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					THE WAY TO
BEE
A guide to Black Economic Empowerment




                                        EVERYTHING MATTERS
THE WAY TO
BEE
A guide to Black Economic Empowerment


This edition of The Way to BEE updates previous
editions and as before, highlights some of the issues
that businesses face implementing BEE. It offers
guidance regarding the interpretation of the Codes
of Good Practice on Broad-Based Black Economic
Empowerment gazetted by the Department of
Trade and Industry (the DTI) on
9 February 2007.


Cliffe Dekker Hofmeyr’s online document
repository located at
www.cliffedekkerhofmeyr.com
contains an updated version of this publication and
a number of important recource documents
pertinent to BEE.


Please do not hesitate to contact a member of
our BEE team should you have any queries relating
to this publication or BEE in general.


The content of this publication does not constitute
legal advice. Interested parties are urged to contact
Cliffe Dekker Hofmeyr for specific advice.




Disclaimer

Whilst every effort has been made to ensure that the information published

in this document is accurate, Cliffe Dekker Hofmeyr takes no responsibility

for any loss or damage suffered by any person as a result of the reliance

on the information contained herein.
1 Introduction                                  3


2 Implementation of BEE                         4


3 The ownership element of BEE                  9


4 The management control element of BEE         18


5 The employment equity element of BEE          21


6 The skills development element of BEE         23


7 The preferential procurement element of BEE   26


8 The enterprise development element of BEE     32


9 The socio-economic development element of BEE 35


10 Verification                                 37


11 Glossary                                     39   CONTENTS
                                             1     INTRODUCTION

                                             Since the publication of the final Codes of Good Practice (the Codes)
                                             under the Broad-Based Black Economic Empowerment Act of 2003
                                             (the BEE Act), the DTI has released an Interpretative Guide to the
                                             Codes, additional guidance notes for complex structures and
                                             transactions and fronting, and equity equivalent programmes, a
                                             manual for the verification of and reporting on BEE, and regulations
                                             regarding the validity of BEE verification certificates. In addition,
                                             the DTI has gazetted a host of sector codes some of which were
                                             gazetted under section 9(1) of the BEE Act and accordingly have
                                             the same legal status as the Codes.

                                             Despite the fact that certain anomalies regarding BEE regulatory
                                             intent remain, there is now far greater clarity than there has ever
                                             been previously. Understanding and implementing BEE substantively
                                             is not only a matter of good corporate citizenship but is also a
                                             business imperative.

                                             There is no single recipe for the successful implementation of a
                                             sustainable BEE strategy. This updated booklet serves to highlight
                                             those aspects of the Codes that must be addressed by any business
                                             that wishes to ensure long term sustainability as a participant in the
                                             South African (SA) economy.

                                             This publication is not an instruction manual and may not be used
                                             or be interpreted as definitive advice on any matter relating to a
                                             particular business's BEE implementation. Users of this publication
                                             are urged to take professional advice regarding BEE and are welcome
                                             to consult us for advice pertinent to their particular business.

                                             As Minister Mandisi Mphalwa stated in March 2005: "Black economic
                                             empowerment is a process. Nobody is expecting every enterprise in
                                             South Africa to be BEE compliant immediately, but government
                                             does expect every enterprise to immediately commence
                                             implementation of BEE with a view to becoming compliant over
                                             the next 10 years."




3 l   Cliffe Dekker Hofmeyr THE WAY TO BEE
2     IMPLEMENTATION OF BEE                                              also to those businesses interacting with the private sector suppliers
                                                                         and service providers to the public sector and those businesses
2.1   Who must comply with BEE?                                          operating within sectors for which sector codes or charters have
                                                                         been gazetted under sections 9(1) and 12 of the BEE Act.
Section 10 of the BEE Act compels organs of state and public entities
"to apply the Codes, wherever reasonably possible" in:                   2.2   Who falls outside of the ambit of BEE regulation?
      determining qualification criteria for the issuing of licences,
      concessions or other authorisations in terms of any law;           The only regulated exemption is that for exempted micro enterprises
                                                                         (EMEs), provided that they give evidence of their qualification as
      developing and implementing a preferential procurement             such. Customers of and development contributors to EMEs are
      policy;                                                            governed by the Codes regarding the manner in which their
      determining qualification criteria for the sale of state-owned     contributions towards EMEs are recognised for purposes of
      enterprises; and                                                   the Codes.

      developing criteria for entering into partnerships with the        The Codes make it clear that all businesses are subject to measurement
      private sector.                                                    of their BEE compliance, except those that are exempt. The fact
                                                                         that the need to implement BEE depends upon businesses having
While this provision is a mandatory obligation of the public sector
                                                                         interaction with the public sector or supplier/service provider
(specifically a national or provincial department, municipality,
                                                                         relationships with other private sector businesses governed by BEE
parliament, a constitutional institution listed under schedule 1 of
                                                                         or because those businesses operate within sectors for which sector
the Public Finance Management Act, 1999 (PFMA) or, public entities
                                                                         codes or charters have been gazetted under sections 9(1) and 12 of
listed in schedule 2 or schedule 3 of the PFMA), it has indirect
                                                                         the BEE Act implies that a business having no such public sector
application to private sector businesses that:
                                                                         interaction or private sector relationship or which does not operate
      have or are required to have a regulatory relationship with        within sectors for which sector codes or charters have been gazetted
      the public sector because they conduct one or other form of        under sections 9(1) and 12 of the BEE Act may be, de facto, exempt
      licensed business activity; or                                     from implementing BEE. An example of such exempt businesses
      provide goods or services to the public sector; or                 would be the retail sector, to the extent that their supplies are made
                                                                         solely to the "man in the street" and manufacturers targeting the
      provide goods or services to other businesses that have a          export market.
      regulatory relationship with the public sector.
                                                                         Business Day (1 February 2007) quoted DTI Deputy Director
Such private sector businesses will find themselves subject to           General, Lionel October as saying at the time that the Codes were
commercial pressure to become and remain BEE compliant and               about to be gazetted that economic sectors such as retail and export
their compliance will be measured according to the principles and        manufacturing, which represented 20%-30% of the economy, were
methodology of the Codes, read with the sector codes applicable to       impervious to BEE. October stated, "People are saying that it is
any business operating in a sector for which a sector code has been      unfair that they have to do empowerment - and there is a cost - and
gazetted under section 9 (1) of the BEE Act, such as the Construction    at the same time have to compete with companies, even if indirectly,
Sector Code, the Forestry Sector Code and the Tourism Sector Code.       which are not doing anything about empowerment." Business Day
Sector charters have also been gazetted under section 12 of the BEE      reported that October had indicated that the DTI would have to
Act for certain sectors, such as the Financial Services Sector, the      devise "creative ways to apply pressure without tampering with the
Property Sector, the Agri-BEE Sector and the Marketing Advertising       right to trade." One option, the newspaper reported, would be to
and Communications Sector. Any business which operates in these          give DTI Minister Mandisi Mphalwa the power to set up charter
sectors will be required to comply (at least as between the private      councils in sectors which had not initiated their own process.
sector operators within the relevant sector) with the provisions of
their applicable sector charter.                                         Cliffe Dekker Hofmeyr's view is that the public relations opprobrium
                                                                         of expressly adopting the view that one's business is, de facto,
Consequently, the pressure to become and remain BEE complaint            exempt from implementing BEE is unlikely to be considered
applies not only to businesses interacting with the public sector, but   desirable to most businesses.


                                                                                          Cliffe Dekker Hofmeyr THE WAY TO BEE            l 4
2.3    What are QSEs, EMEs, start-up enterprises and                     The adjusted scorecards applicable to these specialised enterprises
       specialised enterprises?                                          exclude the ownership element.


QSEs                                                                     2.4   How is BEE compliance achieved?
According to the Codes, any enterprise with an annual total revenue
                                                                         In terms of the Codes, a business achieves BEE compliance by
of between R5 million and R35 million qualifies as a qualifying
                                                                         reference to its overall score achieved on the scorecard applicable
small enterprise (QSE) provided that the qualification does not result
                                                                         to it, as measured by an accredited verification agency applying the
from a circumvention of the BEE Act or the Codes.
                                                                         verification manual, in accordance with the BEE Codes, read with
EMEs                                                                     the sector code applicable to any business operating in a sector
EMEs are those enterprises whose turnover is equal to or less than       for which a sector code has been gazetted under section 9(1) of
                                                                         the BEE Act.
R5 million.
                                                                         Five such scorecards exist:
Start-up enterprises
Start-up enterprises are also measurable as EMEs for the first year      2.4.1 Generic scorecard applicable to all entities (save for those
following their formation or incorporation. This provision applies             that are either exempted; or in respect of which an automatic
regardless of the expected total revenue of the start-up enterprise.           compliance level is recognised; or in respect of which separate
To qualify as a start-up enterprise, independent confirmation of the           scorecards apply under the Codes) which are measured on
status of the enterprise must be provided.                                     all seven BEE elements under this scorecard.
The exception to this provision is when a start-up enterprise is
                                                                         2.4.2 Adjusted generic scorecard for specialised enterprises which
tendering for a contract or seeking any other business in terms of
                                                                               are measured on six of the seven BEE elements under this
section 10 of the BEE Act (refer to paragraph 2.1) with a value
                                                                               scorecard (ownership is excluded).
higher than R5 million. If such contract or other business has a value
of up to R35 million, the start up enterprise must submit a QSE          2.4.3 QSE scorecard applicable to QSEs which are measured on
scorecard, and if the value is in excess of R35 million the start up           any four of the seven BEE elements under this scorecard.
enterprise must submit a generic scorecard. Such scorecards must
be prepared by using annualised data.                                    2.4.4 Adjusted QSE scorecard for specialised enterprises which
                                                                               are also QSEs and which are measured on any four of the six
Note that a start-up enterprise cannot simply be a newly incorporated          BEE elements under this scorecard (ownership is excluded).
continuation of a previous enterprise and any attempt to evade BEE
compliance obligations through opportunistic liquidation and             2.4.5 The sector code scorecards in respect of the sectors for which
re-incorporation would be regarded as an attempt to circumvent                 a sector code has been gazetted under section 9(1) of the BEE
the Codes.                                                                     Act ie the Construction Sector Code, the Forestry Sector
                                                                               Code and the Tourism Sector Code. The Mining Charter and
Specialised enterprises                                                        Scorecard gazetted by the Minister of Minerals and Energy
Specialised enterprises are those which are incapable of being defined         pursuant to the Mineral and Petroleum Resources Development
as being owned or black owned.                                                 Act of 2002, is another scorecard that enjoys the force of law
                                                                               despite not having been gazetted by the DTI under
Specialised enterprises include:                                               section 9(1) of the BEE Act.
       companies limited by guarantee;
                                                                         The transitional scorecard was previously applicable to all entities
       higher education institutions;                                    which chose not to be measured under the generic scorecard for
       non-profit organisations;                                         the first year after the commencement of Statement 000 Code 000
                                                                         (ie until 8 February 2008). The latter date was extended until
       public entities and other enterprises wholly owned by an organ
                                                                         31 August 2008. Under this scorecard, the ownership and
       of state;
                                                                         management BEE elements are multiplied by factor of 1.92 to
       public benefit schemes; and                                       achieve a transitional score for that entity. The transitional period
       section 21 companies.                                             has now expired and the transitional scorecard is no longer applicable.


5 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
The first four of such scorecards (excluding the transitional scorecard)   Entities subject to the generic scorecard and the adjusted generic
are represented as follows:                                                scorecard for specialised enterprises will be scored out of a possible
                                                                           total of 100 points.
Generic scorecard (see paragraph 2.4.1)
Element                                                     Weighting      The approach is slightly more complicated for QSEs. The total
Ownership                                                   20 points      possible score for QSEs is also 100 points. In order to attain this
Management control                                          10 points      score, the QSE must select and be measured in respect of any
Employment equity                                           15 points      four of the elements listed in their applicable scorecard. Where
                                                                           no selection is made, it is assumed that its four best element scores
Skills development                                          15 points
                                                                           will be used for the purposes of measurement.
Preferential procurement                                    20 points
Enterprise development                                      15 points      2.5    The overall performance in terms of these scorecards
Socio-economic development                                   5 points             is then evaluated in accordance with the following
                                                                                  scoring matrix, which indicates the BEE compliance
Adjusted generic scorecard for specialised                                        level of entities:
enterprises (see paragraph 2.4.2)
Element                                   Weighting                        BEE status                       Qualification       Compliance Level
Management control                        15 points
                                                                           Level 1 Contributor              ≥ 100 points                      135%
Employment equity                         15 points
                                                                           Level 2 Contributor              ≥ 85 but <100 points              125%
Skills development                        20 points                        Level 3 Contributor              ≥ 75 but <85 points               110%
Procurement                               20 points                        Level 4 Contributor              ≥ 65 but <75 points               100%
Enterprise development                    15 points                        Level 5 Contributor              ≥ 55 but <65 points                 80%
Socio-economic development                15 points                        Level 6 Contributor              ≥ 45 but <55 points                 60%
                                                                           Level 7 Contributor              ≥ 40 but <45 points                 50%
The QSE scorecard (see paragraph 2.4.3)
                                                                           Level 8 Contributor              ≥ 30 but <40 points                 10%
Element                                                     Weighting      Non-Compliant Contributor <30 points                                  0%
Ownership                                                   25 points
Management control                                          25 points      It is important to note that EMEs are automatically recognised as
Employment equity                                           25 points      Level 4 contributors to BEE, regardless of actual compliance and
                                                                           provided only that proof of such status is provided in the form of
Skills development                                          25 points
                                                                           an auditor's certificate (in the case of a company), an accounting
Preferential procurement                                    25 points
                                                                           officer certificate (in the case of a close corporation) or, a certificate
Enterprise development                                      25 points      by a verification agency. In addition, those EMEs which are also
Socio-economic development                                  25 points      in excess of 50% owned by black people or 50% owned by black
                                                                           women are automatically elevated to Level 3.
Adjusted QSE scorecard for specialised
enterprises (see paragraph 2.4.4)                                          One of the most significant challenges for sole proprietorships and
Element                                                     Weighting      partnerships that do not fall into the category of EMEs but do qualify
Management control                                          25 points      as QSEs is that, with the absence of employees, the employment
                                                                           equity and skills development elements cannot be included in the
Employment equity                                           25 points
                                                                           QSE scorecard or the generic scorecard. This implies that they will
Skills development                                          25 points
                                                                           have only five elements from which to achieve compliance. This
Procurement                                                 25 points      problem may be overcome using the QSE scorecard (provided the
Enterprise development                                      25 points      turnover threshold applies), since only four of the elements are
Socio-economic development                                  25 points      measured, provided that the owner of that sole proprietorship is black.


                                                                                             Cliffe Dekker Hofmeyr THE WAY TO BEE               l 6
2.6   How is BEE compliance evidenced?                                       2.8   What is the status of sector transformation charters?

In terms of the Codes, the only reliable evidence of the compliance          There was some uncertainty, prior to the promulgation of the
of any business is a verification certificate issued annually by an          finalised Codes, as to the relationship between the Codes and
accredited verification agency. For further information on verification      so-called sector transformation charters, particularly the legal status
please refer to chapter 11.                                                  enjoyed by charters in relation to the Codes, and ultimately which
                                                                             set of benchmarks and targets members of a particular sector were
2.7   Who are the intended beneficiaries of BEE?                             required to follow. This uncertainty has been laid to rest in the
                                                                             finalised Codes which sets out clearly the inter-relationship between
There is a touch of irony in this question, but it remains one of the        these various statements of BEE.
most often queried aspects of BEE.
                                                                             The BEE Act and the Codes recognise sector transformation charters
A black person, the Codes tell us, is an African, Coloured or Indian         as evidence of the commitment by the participants in sectors that
natural person who:                                                          adopted them to implement BEE. Sector transformation charters
      is a citizen of the Republic of South Africa (the RSA) by birth        are therefore contextual formulations of BEE. Implicit in the
      or by descent; or                                                      recognition given to sector transformation charters in the Codes is
                                                                             an understanding that a formalistic application of BEE can, in certain
      is a citizen of the RSA by naturalisation which was completed          circumstances, lead to adverse results and detract from the goals of
      prior to the coming into effect of the Constitution of the             positive social transformation that underpins our BEE legislation.
      Republic of South Africa Act of 1993 (the Constitution); or            Sector transformation charters are gazetted by the Minister of Trade
      became a citizen of the RSA by naturalisation after the coming         and Industry under section 12 of the BEE Act.
      into effect of the Constitution, "... but who, but for the Apartheid
      policy that had been in place prior to that date, would have           Examples of sector transformation charters that have been gazetted
      been entitled to acquire citizenship by naturalisation prior           thus far under section 12 of the BEE Act are:
      to that date."
                                                                                   the Financial Services Sector Charter;
This means that all categories of natural persons previously subject               the Property Sector Charter;
to some form of discrimination, but who are not black people as
                                                                                   the Agri-BEE Sector Charter; and
defined, do not qualify as beneficiaries of BEE.
                                                                                   the Marketing, Advertising and Communications Charter.
While this definition has added clarity to the context of BEE, there
remain niggling questions as to the status of so-called "Asians" and         These charters do not have any legal or regulatory weight and only
other South Africans who were not considered "White" under                   have application to participants in those sectors as between them.
apartheid legislation, but who were also not African, Coloured or
Indian. A case in point is South Africa's Chinese community, many            Notwithstanding the existence of a sector transformation charter in
of whom are third and fourth generation South Africans and who               a particular industry (whether or not gazetted under section 12 of
were subject to unfair discrimination on the basis of race under             the BEE Act), the Codes are the legally relevant benchmark for
apartheid legislation.                                                       purposes of measuring BEE compliance. Where a sector
                                                                             transformation charter holds force (even if not recognised legally)
On 18 June 2008, the then Transvaal Provincial Division of the High
                                                                             is in industry participants' interactions with one another. In such
Court granted a declaratory order in the matter of Chinese Association
                                                                             instances, industry members will look to the relevant sector
of South Africa and Others vs the Ministers of Labour, Trade and
                                                                             transformation charter for measurement of compliance with BEE
Industry, and Justice and Constitutional Development, declaring
                                                                             targets even though legally, reference will be had to the Codes.
inter alia that, "the South African Chinese people fall within the
ambit of the definition of "black people" in section 1 of the BEE Act,
2003." Apart from the merits of the matter, it remains to be seen
whether such judicial "law making" passes constitutional muster.


7 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
2.9   What is the status of sector codes?                                   It is also important to note that the Mining Charter and Scorecard
                                                                            developed by the Minister of Minerals and Energy pursuant to the
A sector code gazetted by the Minister of Trade and Industry under          Mineral and Petroleum Resources Development Act of 2002, enjoys
section 9(1) of the BEE Act has equal legal status to that of the           the status of law within the context of that legislation. On 29 April
Codes, and is therefore binding on organs of state and public entities      2009, the Minister of Minerals and Energy gazetted Codes of Good
as well as the private sector.                                              Practice for the Minerals Industry (DME Codes). While the DME
                                                                            Codes have the hallmarks of a hurried attempt to achieve greater
Examples of sector codes that have been gazetted under section 9(1)
                                                                            clarity regarding the principles and methodology applied by the
of the BEE Act are:
                                                                            Department of Minerals and Energy to empowerment within the
      the Construction Sector Code;                                         mining sector and, alignment between the application of
                                                                            empowerment in the mining sector on the one hand and the BEE
      the Forestry Sector Code; and
                                                                            Act and Codes on the other, the DME Codes contain a number of
      the Tourism Sector Code.                                              anomalies and ambiguities. The DME Codes do not deal with
                                                                            important BEE issues that have vexed the mining sector since the
These sector codes, although legally binding, will inevitably have
                                                                            adoption of the Mining Charter such as inter alia, the "continuing
to be read with the Codes for purposes of interpretation of concepts
                                                                            consequences" or "once empowered always empowered" principle
and the application of various principles that are dealt with extensively
                                                                            and the recognition of juristic persons as Historically Disadvantaged
in the Codes but not in these sector codes. The pre-requisites for
                                                                            South Africans (in contradistinction to the BEE Act and Codes,
the gazetting of sector codes under section 9 of the BEE Act are
significantly more onerous than those for the gazetting of sector           which uses the term "Black Persons" and only recognises natural
transformation charters, and include, amongst others, the following         persons for the purposes of their definitions). The anomalies within
requirements:                                                               the DME Codes and, the material contradictions between the DME
                                                                            Codes and the Codes will continue to create challenges regarding
      the proposed sector code must address all the elements in the
                                                                            transaction structuring in the mining industry, and regrettably, the
      generic scorecard contained in the Codes, use the same
                                                                            longstanding regulatory uncertainty regarding BEE in the mining
      definitions as those in the Codes and the same calculation
      methodologies as in the Codes;                                        industry persists.

      the proposed sector code may only deviate from the targets
      and weighting used in the Codes if such deviations are                2.10 What is the status of the enterprises definitions?
      justifiable based on sound economic principles; and
                                                                            A hallmark of all the transformation charters currently in existence
      the representative of the sector which is seeking to gazette a
                                                                            and a central theme of all government initiatives around BEE prior
      sector code must make application to the Minister for gazetting
                                                                            to the Codes, were the enterprise definitions. These were essentially
      of the proposed sector code and the Minister may refuse to
                                                                            "quick and dirty" measurement mechanisms that allowed BEE status
      do so if it does not meet the aforementioned criteria.
                                                                            to be attributed to a business based solely on its overall black
                                                                            ownership. These enterprise definitions included black owned
In terms of process, a sector code must first be gazetted under
                                                                            companies, black empowered companies, black influenced
section 9(5) of the BEE Act for public comment, where after
                                                                            companies, black women owned companies and HDSA companies
interested persons will be given a minimum of 60 (sixty) days in
which to comment on the draft sector code. Once the process in
                                                                            These enterprise definitions have not found their way into the
section 9(5) is complete, with comments from interested parties
                                                                            final Codes and may, for all intents and purposes, be considered
being taken into account and integrated into the draft sector code,
                                                                            no longer applicable.
the final sector code is gazetted. The effect of gazetting is to confer
the same status as the BEE Codes on the sector code, which becomes
                                                                            But two enterprise definitions remain that are the functional equivalent
binding on all industry participants as well as the Government in
                                                                            of the previous definition of black owned companies, namely:
measuring BEE compliance in that industry.


                                                                                              Cliffe Dekker Hofmeyr THE WAY TO BEE             l 8
      BEE controlled company - a juristic person in which black         commercial grounds. The fact that a subsidiary or division falls into
      persons hold more that 50% of the total exercisable voting        a different sector to its holding company is always considered a
      rights in that juristic person, measured using the flow through   sound commercial ground.
      principle; and
                                                                        The methodology for consolidating scorecards differs slightly in
      BEE owned company - a juristic person in which black persons      that ownership and board membership is limited to the holding
      hold more that 50% of the total economic interest in that         company. Ownership points in a holding company can be achieved
      juristic person, measured using the flow through principle.       through the selling of shares at subsidiary level. All other elements
                                                                        are measured on the basis of a straight consolidation of all compliance
An exception to this general rule is that the procurement scorecard     statistics across the group or divisional structure, rather than an
includes 5 points recognising procurement from entities based solely    apportionment of compliance-based contributing entity size.
on their levels of black ownership and black women ownership, and
the enterprise development scorecard recognises enterprise              Similarly, special provision has been made for so-called "related
development contributions for beneficiary enterprises qualifying to     EMEs" and "related QSEs".
receive such benefit solely on the basis of their level of black
ownership and black women ownership.                                    Related EMEs are EMEs that are controlled by a measured EME,
                                                                        whether directly or indirectly and over whom the measured EME
                                                                        has direct or indirect control. If the combined turnover of related
2.11 What is the relevance of the transitional period?                  EMEs is over R5 million, then they must obtain either a consolidated
                                                                        scorecard as if they were a group structure or individual scorecards
The transitional period expired on 31 August 2008 and is no longer      for each related enterprise. If the combined turnover is less than
applicable or relevant.                                                 R5 million then each entity remains exempt from obtaining a scorecard.

                                                                        Related QSEs are QSEs that are controlled by a measured QSE,
2.12 Compliance reports: A look into group and divisional               whether directly or indirectly and over whom the measured QSE
     structures, related EMEs and unincorporated                        has direct or indirect control. If the combined turnover of related
     Joint Ventures                                                     QSEs is over R35 million, then they must obtain either a consolidated
                                                                        scorecard as if they were a group structure or individual scorecards
The DTI has released certain guidance notes on the subject of groups    for each related enterprise.
and divisional structures. These structures may report either on a
consolidated basis or by entity. If a group or divisional structure     Unincorporated joint ventures may obtain consolidated scorecards
elects to report on a consolidated basis, then it may only exclude      as if they were group structures, provided that such consolidated
individual entities from the consolidation if justified on sound        scorecards are prepared for every separate venture.




3     THE OWNERSHIP ELEMENT OF BEE


3.1   How is ownership measured under the Codes?

Ownership is weighted as contributing 20 points under the generic       The ownership element of BEE is measured using an ownership
scorecard and 25 points under the QSE scorecard.                        scorecard. This scorecard differs depending on whether the business
                                                                        being measured is QSE or not.
Ownership contributions to BEE are regulated in terms of Code
series100.


9 l    Cliffe Dekker Hofmeyr THE WAY TO BEE
The following ownership scorecard applies under the generic scorecard applicable to non-QSEs:

Ownership indicator                                                        Weighting                Target
Voting rights
exercisable voting rights in the enterprise in the hands of black people   3                        25%+1 vote

exercisable voting rights in the enterprise in the hands of black women    2                        10%

Economic interest
Economic interest of black people in the enterprise                        4                        25%

Economic interest of black women in the enterprise                         2                        10%

Economic interest in the enterprise of black designated groups,            1                        2.50%
Black participants in employee ownership schemes,
Black participants in broad-based ownership schemes and
Black participants in co-operatives natural people

Realisation points

Ownership fulfilment                                                       1
Net asset value                                                            7

Bonus points

Involvement in the ownership of the enterprise of black new entrants       2                        10%

Involvement in the ownership of the enterprise of black participants       1                        10%
in employee ownership schemes, broad-based ownership schemes
and co-operatives

The following ownership scorecard applies under the QSE scorecard applicable to QSEs:

Ownership indicator                                                        Weighting                Target
Voting rights
Exercisable voting rights in the enterprise in the hands of black people   6                        25%+1 vote
Economic interest
Economic interest of black people in the enterprise                        9                        25%
Realisation points
Ownership fulfillment                                                      1
Net asset value                                                            9
Bonus points

Involvement in the ownership of the enterprise by black participants       1                        10%
in employee ownership schemes, co-operatives or of broad-based
ownership schemes

Involvement in the ownership of the enterprise of black women              2                        10%


                                                                               Cliffe Dekker Hofmeyr THE WAY TO BEE   l 10
3.2    What are voting rights and how are they measured?                 Economic interest payable directly to black people arising from
                                                                         their ownership of the measured business is expressed as the
A voting right is the right of an owner of a business to participate     percentage that such economic interest bears to the total economic
in the control of that business in a manner analogous to the exercise    interest payable to all the owners of the measured business. Where
by a shareholder of the shareholder's voting right.                      economic interest is payable through an intermediary vehicle, the
                                                                         Codes provide for a so-called "flow-through principle" which
In order to be recognised, the voting right must be exercisable by       mathematically attributes a level of black participation in such
the owner thereof. Where that right has been ceded, assigned or          economic interest.
similarly transferred to another person, those voting rights will
generally not be recognised.                                             It is crucial to understand that economic interest in an intermediary
                                                                         vehicle is measured in precisely the same manner as is the case in
Voting rights exercisable by black people directly in the measured       respect of the measured business.
business are expressed as the percentage of the total voting rights
exercisable by all persons directly in the measured business.            Economic interest payable through an intermediary vehicle dilutes
                                                                         at each intermediary level to the extent of non-black participation
Where the voting rights are exercisable through an intermediary
                                                                         in the economic interest payable by each such intermediary vehicle.
vehicle, the Codes provide for a so-called "flow-through principle",
which mathematically attributes a level of black participation in
                                                                         In the context of intermediary vehicles that are companies with a
those voting rights. It is crucial to understand that voting rights in
                                                                         share capital, the principle of dilution by reason of non-black
an intermediary vehicle are measured in precisely the same manner
                                                                         participation is not as severely treated by reason of the application
as is the case in respect of the measured business and the fact that
                                                                         of the modified flow-through principle (see paragraph 3.11 below).
non-black voting rights are exercised by a black representative (and
vice versa) is not relevant.
                                                                         3.4   What are the ownership targets under the generic
Generally, voting rights held through an intermediary vehicle dilute           scorecard?
at each intermediary level to the extent of non-black participation
in the voting rights of each such intermediary vehicle. In the context   Under the generic scorecard, separate targets are established for
of intermediary vehicles that are companies with share capital,          participation by black women and for participation of black
dilution by reason of non-black participation is not as severely         designated groups, black participants in certain types of broad-
treated by reason of the application of the modified flow-through        based ownership schemes and black participants in co-operatives.
principle (see paragraph 3.11 below).
                                                                         A measured business cannot attain full-marks for ownership in the
3.3    What is economic interest and how is it measured?                 absence of participation by black people falling within those
                                                                         categories.
Economic interest is defined as a claim against an entity representing
                                                                         The category "black designated groups" includes black people who
a return on ownership of the entity. Many BEE commentators often
                                                                         are also:
use the term "economic interest" as if it bears the same meaning
as dividend entitlement. This is not strictly the case.                        unemployed people who are not attending or awaiting
                                                                               acceptance to attend an educational institution;
Preferent dividends resulting from a debt financing arrangement do
not always constitute economic interest, while non-dividend payments           youth;
to shareholders which are excessive, paid in bad faith or intended             disabled; or
to circumvent the BEE Act and the Codes, are treated as
                                                                               living in rural and underdeveloped areas.
economic interest.
                                                                         "Black aged persons" are not included in the definition of black
Generally, dividend entitlement will constitute economic interest,
                                                                         designated groups in the Codes. One would naturally assume that
and economic interest will only in exceptional circumstances not
                                                                         black people over the age of 65, who lived through and survived
comprise dividend entitlement.


11 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
the entire period of apartheid, are among the most deserving              in their operations in other countries. Three programmes have been
beneficiaries of BEE, but this is not the position under the Codes.       predefined in the Codes:
Broad-based ownership schemes will be discussed separately below.
                                                                                programmes supporting the SA Government's Accelerated
                                                                                and Shared Growth Initiative (ASGISA), Joint Initiative for
3.5   What is measurable value?
                                                                                Priority Skills Acquisition (JIPSA) and NSDS initiatives;

The first procedure in evaluating ownership is to determine what                programmes promoting enterprise creation in respect of
value ownership will be measured against.                                       co-operatives; and

                                                                                programmes promoting socio-economic advancement or
Ownership is measured against the value of the SA operations of
                                                                                contribute to the overall social development of South Africa.
the measured enterprise. Government ownership is not relevant to
the measurement of ownership.                                             Equity equivalents are not limited to these three programme types
                                                                          and the DTI may, upon application, approve any other viable
We therefore begin by excluding any value derived from non-               programme. An equity equivalent programme must include such
domestic operations as well as SA government ownership. There             details as a full description of its objectives and projected outcomes,
are no limitations on the total exclusion on this basis from measurable   qualification criteria, and timelines for implementation. Equity
value. Since 100% government-owned entities are subject to the            equivalent programmes are expected to contribute toward the
adjusted generic scorecard (which excludes ownership), the potential      achievement of the following objectives:
100% exclusion is of no consequence to them. Similarly, SA owned
                                                                          1.    Enterprise creation and development;
enterprises which are entirely non-domestic are not within the ambit
of the Codes (at present) and, hence, a 100% exclusion is of no           2.    Foreign direct investment;
consequence to them either.                                               3.    Accelerated empowerment of black rural women;
                                                                          4.    Sustainable growth and development;
3.6   How does the evaluation of the BEE compliance of
                                                                          5.    Human development with focus on education and skills
      multinationals differ from those of domestic entities?
                                                                                development; and

The next question to be asked is whether the measured enterprise          6.    Infrastructure investment with emphasis on developing the
has multinational ownership or not.                                             country's research and development infrastructure.


If so, it is important to understand that foreign multinationals and      The targets are set at either 25% of the value of the SA operations
SA multinationals are only required to evaluate their operations in       of the multinational using a standard valuation methodology or 4%
South Africa for BEE purposes.                                            of its total revenue from its SA operations every year for 10 years.
                                                                          Both targets can be achieved on either an upfront once off basis or
Two options are now available to the multinational enterprise,            on an annual basis towards a ten-year target.
namely equity equivalents or offshore equity.
                                                                          3.8   What is offshore equity?
3.7   What is an 'equity equivalent'?
                                                                          Offshore equity allows ownership by black people in an offshore
                                                                          multinational parent (or its subsidiary) to count as ownership in its
An equity equivalent programme is a public or private programme
                                                                          SA business.
or scheme which is approved by the Minster of Trade and Industry
and designed to recognise a multinational's contribution to BEE           The recognition methodology depends on the multinational having
ownership in lieu of a sale of equity to black people. An equity          sold a portion of its shares in its offshore holding company (or its
equivalent programme may only be relied upon by multinationals            subsidiary) to SA black people. The percentage value of those shares
that are able to show that they have a global practice (pre-existing      determined in relation to the value of the SA operations of that
the promulgation of the BEE Act) of not alienating equity or assets       multinational represents the economic interest held by black people


                                                                                          Cliffe Dekker Hofmeyr THE WAY TO BEE             l 12
in the multinational for purposes of the Codes, and the percentage         ownership in the measured entity are the modified flow-through
voting rights attaching to those shares represents the exercisable         principle and the exclusion principle.
voting rights of black people in that multinational. A multinational
that utilises the offshore equity provisions of the Codes will have        3.11 What is the modified flow-through principle?
ownership measured in terms of the ownership scorecard.
                                                                           The modified flow-through principle applies only to any BEE owned
3.9    What are qualifying transactions and associated                     or controlled companies in the ownership of a measured entity
       enterprises?                                                        and is explained in the Codes in the following terms:
                                                                           “Where, in the chain of ownership, black people have an effective
Save for as stated in respect of equity equivalents, offshore equity       flow-through interest in excess of 50%, then only once in the chain
and "consolidated" groups, there are only two means by which               may that effective interest be treated as 100% black shareholding”.
ownership recognition can be achieved:
                                                                           The modified flow-through principle applies to both economic
       black-owned equity in the measured enterprise; or
                                                                           interest and voting rights.
       black-owned equity in an associated enterprise.
                                                                           This implies that companies may 'gross-up' one black majority-
Associated enterprises are those with which qualifying transactions
                                                                           owned company in an ownership structure to a 100% black owned
have been concluded.
                                                                           in every chain of ownership leading into the measured enterprise.
                                                                           While the term "chain" is not defined, logic dictates that a chain is
Qualifying transactions are a means for an enterprise to effectively
                                                                           the entire structure that exists above each of the direct shareholders
treat black ownership in an associated enterprise as if it were
                                                                           in the measured enterprise.
ownership in the measured enterprise and results from the sale by
the measured enterprise of assets or businesses, or the sale of shares
                                                                           The modified flow-through principle applies only to the measurement
in subsidiaries (to that associated enterprise) which must result in:
                                                                           of the voting rights and economic interest held by black people
       the creation of sustainable businesses for black people; and        generally (that is, only paragraphs 2.1.1 and 2.21 of the ownership
       the transfer of specialised skills or productive capacity to        scorecard). It does not apply to the measurement of voting rights
       black people.                                                       and economic interest under any of the other indicators of the
                                                                           ownership scorecard. Importantly, it does not apply in the calculation
The qualifying transaction must involve a separate enterprise              of realisation points under Annexe 100 (C) to Code 100.
(the associated enterprise) which has:
       no unreasonable limitations as to its clients or customers;         3.12 What is the exclusion principle?

       clients, customers or suppliers other than the seller; and
                                                                           3.12.1 Ownership held by organs of state or public entities
       no unreasonable limitations and no operational outsourcing
                                                                           Ownership in a measured enterprise held directly by organs of state
       arrangements negotiated with the seller that were not
                                                                           or public entities must be excluded unless the Minster has designated
       concluded at arms-length or on a fair and reasonable basis.
                                                                           (by gazette) such entities as BEE Facilitators, in which case the
The percentage represented by the value of the qualifying transaction      Codes provide for specific levels of black ownership recognition
divided by the value of the selling entity, multiplied by the percentage   attributable to black people generally, black women and black
black ownership in the associated enterprise, is considered to be          designated groups.
black ownership in the measured entity.
                                                                           3.12.2 Ownership held directly by mandated investments
3.10 What are the measurement approaches?                                  Up to 40% of the ownership in a measured enterprise may be
                                                                           excluded if it emanates from so-called "mandated investments".
The next step in the process is to elect a measurement principle.          Mandated investments are described as any investments made by
Two fundamental principles applicable to the measurement of black          or through any third party regulated by legislation on behalf of the


13 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
actual owner of the funds. These include:                                     a broad based ownership scheme which forms part of a
                                                                              section 21 company which holds rights of ownership in a
      investments of collective investment schemes;
                                                                              measured entity may contribute a maximum of 40% of the
      investments of pension funds;                                           total points on the ownership scorecard if it meets the
      investments of medical schemes;                                         qualification criteria for broad-based ownership schemes under
      investments of long-term insurers (but specifically limited             Annexe 100 (B), or 100% if they meet the additional
      to policyholder funds); and                                             qualification criteria under Annexe 100 (B).

      investments of banks (but specifically limited to                  Alternatively, if a measured enterprise wishes to exclude such
      depositors funds).                                                 ownership, up to 40% of the ownership by section 21 companies
                                                                         or companies limited by guarantee may be excluded.
A measured enterprise electing not to exclude mandated investments
may either treat all of the ownership by such mandated investments       3.13 Black managed private equity funds
as non-black, or may obtain a competent person's report estimating
the extent of black ownership measurable in the measured entity as       A company may treat any of its ownership arising from a private
a result of ownership by the mandated investment. It is important        equity fund as if that ownership were held by black people, where
to note that a measured entity cannot elect to exclude some mandated     the private equity fund meets the following criteria:
investments and include others. It either includes or excludes all
                                                                               more than 50% of any voting rights associated with the shares
mandated investments.
                                                                               through which the private equity fund holds rights of ownership
In effect, in the case of mandated investments, if a measured entity           are held by black people;
with 15% black ownership elected to exclude the full 40% of
                                                                               more than 50% of profits made by the private equity fund
ownership held by mandated investments, the measured entity would
                                                                               after realising any investment made by it must, by written
in effect be considered 25% black owned.
                                                                               agreement, accrue to black people;

3.12.3 Ownership held directly by Section 21 companies or                      the private equity fund manager must be a BEE owned
       companies limited by guarantee                                          company; and
Equity interests held in a measured enterprise by section 21 companies         more than 50% of the value of funds invested by any private
or companies limited by guarantee may also be included or excluded             equity fund must at all times be invested in black owned
at the election of the measured enterprise.                                    enterprises that were at least 25% black owned before the
                                                                               investment of the private equity fund.
Attention is drawn to the fact that section 21 companies or companies
limited by guarantee are measured according to the adjusted generic
                                                                         The above qualification criteria are immensely stringent. The DTI
scorecard or adjusted QSE scorecard. Accordingly, if a measured
                                                                         has sought to soften the requirements in the Interpretive Guide by,
enterprise wishes to include ownership by section 21 companies or
                                                                         inter alia, replacing references to the "private equity fund" with
companies limited by guarantee in its scoring under the ownership
                                                                         references to the "private equity fund manager". It is crucial to note
indicator of the generic scorecard, then:
                                                                         that the Interpretive Guide does not have the force of law and the
     the measured enterprise may either treat all of that ownership      provisions of the Codes supersede the Interpretive Guide. Caution
     as non-black or, obtain a competent persons report estimating       must therefore be exercised when applying provisions of the
     the extent of black ownership measurable in the measured            Interpretive Guide which are contrary to those of the Codes.
     entity as a result of ownership by those section 21 companies
     or companies limited by guarantee;                                  3.14 Continued recognition of ownership after the loss or
     in the case of ownership by section 21 companies or companies            sale of shares by black participants
     limited by guarantee that house broad based ownership schemes,
     the specific rules pertaining to the latter in Code 100 will have   This is a complex provision which in essence permits continued
     to be observed; and                                                 (but limited) recognition by a measured entity of the ownership by


                                                                                         Cliffe Dekker Hofmeyr THE WAY TO BEE            l 14
a black participant that has sold or lost its shares in the measured             which provides a time limit to continued recognition in
enterprise.                                                                      such instances.

The continued recognition is subject to the following criteria:            The formula for the calculation of the continued recognition points
       the black participant must have held its shares for a period of     is provided for in Annexe 100(C) of Code 100.
       at least three years;
                                                                           3.15 What is net value and how is it measured?
       value must have been created in the hands of black people;
       and
                                                                           The net value measurement in the Codes is intended to measure the
       transformation must have taken place within the measured            level of indebtedness of black people in the ownership of a measured
       enterprise.                                                         business. Such indebtedness is only relevant to the extent that it
                                                                           was incurred in order to facilitate the acquisition of such ownership.
The black ownership arising from continued recognition of black
                                                                           The net value points' calculation is based on the lower result of the
participation in the measured enterprise is limited to no more than
                                                                           application of two formulae set out in Annexe 100 (C) of Code 100.
40% of the score on the ownership scorecard and the ownership
points attributable to the measured entity must be calculated by
                                                                           The first formula (Formula A under Annexe 100(C)) may be
multiplying the following elements:
                                                                           summarised as being based upon the current net value of interests
       the value created for black people as a percentage of the value     held by black people (taking into account growth in value of the
       of the measured entity at the date of the loss of shares as a       underlying measured entity and the current balance of any acquisition
       percentage of measured entity's value;                              finance owing by such black people) as a percentage of the value
                                                                           of the measured entity, multiplied by a graduation factor and
       the BEE status of the measured entity based on the balanced
                                                                           multiplied by the seven points for net value.
       scorecard (on the generic scorecard for all elements other
       than ownership) at the date of measurement; and
                                                                           It is intended that within 10 years of the commencement of the
       the ownership points that were attributable to the measured         transaction, the targeted level of compliance will be 25%, but that
       enterprise on the date of sale or loss.                             target has been graduated over the 10 year period with a target of
                                                                           2.5% at the end of the first year, 5% at the end of the second year,
No time limit for the continued recognition of the lost or sold black
                                                                           and a further 5% for every two years thereafter until the expiry of
equity is provided for in the Codes.
                                                                           a period of 10 years.
An appreciation in the value of the measured entity over time (after
                                                                           The second formula (Formula B under Annexe 100 (C)) may be
the loss or sale) will impact the measured entity's points for continued
                                                                           summarised as being based upon the percentage economic interest
recognition, because the relevant time for the valuation of the black
                                                                           held by black people in the measured entity relative to the targeted
equity interests which has been lost or sold is the date of such loss
or sale, while the relevant time for the valuation of the measured         percentage for black ownership (25%) under the ownership indicator,
entity is the date at which valuation (for purposes of the continued       multiplied by the 7 points for net value.
recognition points) occurs.
                                                                           For BEE transactions in which black people have acquired 25% of
The only qualification to the latter observations is that in the case      the measured enterprise, Formula A will invariably yield the lesser
of a loss of shares by the black participant, the following additional     result and, therefore, should be the one to which particular attention
rules apply:                                                               must be paid in order for a measured enterprise to score maximally
                                                                           for net value.
       a written tripartite agreement between the measured enterprise,
       the black participant and a lender must record the loan or
                                                                           Bear in mind that the flow through principle must be applied in the
       security arrangement, unless the measured enterprise is the
                                                                           application of Formula B and not the modified flow-through principle.
       lender; and
       the period over which the points were allocated or recognised       Transactions undertaken prior to the commencement of the Codes
       will not exceed the period over which the shares were held -        are measured against the 10-year target with effect from the


15 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
commencement of the Codes, thereby providing a significant benefit          3.18 How is black ownership through a broad-based
for early performers.                                                            ownership and employee ownership scheme measured?

Indebtedness of intermediary vehicles may be deemed to be                   The minimum requirements for a black broad-based ownership
indebtedness in the hands of the ultimate black owners in certain           scheme are outlined below:
circumstances.
                                                                                 the management fees of the scheme must not exceed 15%
                                                                                 of total revenues;
3.16 How is the ownership fulfilment point awarded?
                                                                                 the constitution of the scheme must record the rules governing
Where black people holding rights of ownership in a measured                     any portion of economic interest received and reserved for
entity have encumbered those rights pursuant to a finance arrangement            future distribution or application;
whereby the acquisition of those rights was facilitated, the ownership           at least 85% of the value of benefits allocated by the scheme
fulfilment point will not be awarded until such time as the                      must accrue to black people;
encumbrance has been removed.
                                                                                 at least 50% of the fiduciaries of the scheme must be
                                                                                 independent persons having no employment with or direct
The ownership fulfilment point can in any event not be awarded unless
                                                                                 or indirect beneficial interest in the scheme;
the measured business has attained a score of 7 out of 7 for net value
(which implies that the targeted 25% of economic interest by black people        at least 50% of the fiduciaries of the scheme must be black
in the measured entity must also have been achieved).                            people and at least 25% must be black women;
                                                                                 the chairperson of the scheme must be independent; and
Encumbrances on the rights of intermediary vehicles may be deemed
to be encumbrances against the ultimate black owners in certain                  on the winding-up or termination of the scheme, all
circumstances.                                                                   accumulated economic interest must be transferred to
                                                                                 beneficiaries or an entity with similar objectives.
3.17 How are the bonus points awarded?
                                                                            The minimum requirements for Employee Share Ownership
                                                                            Schemes (ESOPs) are outlined below:
Bonus points may be awarded for the introduction of black new
entrants or black participants in broad-based ownership schemes                  the scheme constitution must define the beneficiaries and the
into the ownership of a business. Black new entrants are black                   proportion of their claim to receive distributions - a written
people who have never previously held equity interests in any                    record of the name of the participants or the use of a defined
other entity with a cumulative value in excess of R20 million.                   class of natural persons satisfies the requirement of
                                                                                 identification, and a written record of fixed percentages of
It is important to note that the award of the bonus points against the           claim or the use of a formula for calculating claims satisfies
participation by black new entrants is effectively a "high-water                 the need for defining proportion of benefit;
mark" measurement. If black people qualify as new entrants upon                  the fiduciaries of the scheme must have no discretion as to
their entry into the equity of the measured entity, they will retain             the identity of beneficiaries or the proportion of their benefit;
that status (for purposes of that measured entity) regardless of
                                                                                 the beneficiaries must appoint at least 50% of the fiduciaries
subsequent transactions undertaken by them.
                                                                                 of the scheme;
Two bonus points are awarded for the targeted percentage ownership               the beneficiaries must participate in the management of the
(10%) for black new entrants; and one bonus point is awarded for                 scheme at a level similar to the management role of
the targeted percentage ownership (10%) by black people via                      shareholders in a company having shareholding;
employee ownership schemes, broad-based ownership schemes
                                                                                 the constitution, or other relevant statutory documents, of the
and co-operatives.
                                                                                 scheme must be available on request to any beneficiary in an
                                                                                 official language in which that person is familiar;


                                                                                          Cliffe Dekker Hofmeyr THE WAY TO BEE             l 16
       all accumulated economic interest of the scheme must be             In order for ownership arising from black participation in trusts to
       payable to the beneficiaries at the earlier of a date or event      be recognised by a measured entity as black ownership for 100%
       specified in the scheme constitution, or on the termination or      of the total points on the ownership scorecard, trusts must be able
       winding-up of the scheme; and                                       to demonstrate that they have been created for a legitimate
                                                                           commercial reason, which must be fully disclosed, and the terms
       the scheme fiduciaries must present the financial reports of
                                                                           of the trust must not seek to directly or indirectly circumvent the
       the scheme to beneficiaries annually at an annual general
                                                                           Codes and the Act. These additional requirements must be confirmed
       meeting of the scheme.
                                                                           in a certificate to this effect by a "competent person", presumably
Once the minimum requirements are achieved in either a broad-              an attorney, accountant, tax consultant or estate planner.
based scheme or an ESOP, ownership by such scheme in the measured
entity can be recognised as black ownership up to a maximum                We are of the view that trusts structured for estate planning or tax
cumulative level of 40% of the total points on the ownership               purposes must meet the requirement of legitimate purpose, and that a
scorecard.                                                                 family trust can hardly be suggested as not qualifying for full recognition.
                                                                           It would also appear to be the case that broad-based schemes and
In order for ownership by a broad-based scheme or an ESOP to be            ESOPs, commonly structured as trusts, may have difficulty in satisfying
recognised as black ownership for 100% of the total points on the          these additional requirements. Special attention will have to be paid
ownership scorecard, such schemes must demonstrate that they have          to these types of structures if it is intended to rely on them for recognition
a track record of operating as such, or, in the absence of such a          of 100% of the points on the ownership scorecard.
track-record, demonstrable evidence of full operational capacity to
operate as such a scheme.                                                  Trusts which do not qualify as ESOPs or broad-based ownership
                                                                           schemes will not count towards the bonus point allocation.
Operational capacity must be evidenced by suitably qualified and
experienced staff in sufficient number, experienced professional           3.20 How is government ownership measured?
advisors, operating premises and all other necessary requirements
for operating a business.                                                  Ownership by organs of state is generally considered neither black
                                                                           nor non-black. As such, any level of government ownership in a
3.19 How is black ownership through a trust measured?                      measured business must be excluded from all calculations, unless
                                                                           the Minster has designated (by gazette) such entities as BEE
Black ownership arising from black participation in trusts is              Facilitators, as discussed at 3.12 above.
recognised subject to the same cumulative maximum of 40% of the
                                                                           Wholly state-owned public entities are themselves subject to
ownership points applicable to ESOPs and broad-based schemes,
                                                                           ownership measurement under the adjusted generic and QSE
provided that they meet the following requirements (which are less
                                                                           scorecards and need only comply with the six elements of BEE,
strict than those of ESOPs and broad-based ownership schemes):
                                                                           other than ownership.
       the trust deed must define the beneficiaries and the proportion
       of their entitlement to receive distributions - a written record    3.21 How are preference shares treated?
       of the name of the beneficiaries or the use of a defined class
       of natural persons satisfies the requirement of identification      Preference shares in a company, which have the characteristics of
       and, a written record of fixed percentages of entitlement or        debt, are treated by the Codes as being an ordinary loan subject to
       the use of a formula for calculating entitlement satisfies the      measurement under the net value aspect of the ownership scorecard
       need for defining proportion of benefit; and                        if the "debt" is that of black people, and payment of preferent dividends
                                                                           in respect of such shares does not constitute economic interest.
       the fiduciaries of the scheme must have no discretion as to the
       identity of beneficiaries or the proportion of their benefit; and   It is crucial to note that where a preference share or other similar
       on winding-up or termination of the trust, all accumulated          debt-equity instrument has a hybrid nature which includes the
       economic interest must be transferred to the beneficiaries or       characteristics of debt and of equity, only the portion that represents
       to an entity representing the interests of the beneficiaries or     debt will be treated as an ordinary loan and the balance will be
       class of beneficiaries.                                             treated as ordinary equity.


17 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
If a black person holds an option to acquire equity at a future date:          the value of the option will be applied to the calculation of
                                                                               current equity interest.
      voting rights irrevocably transferred to the (black) holder of
      that option for the duration of the option period and which
      are exercisable by the (black) holder prior to the exercise of     3.22 What are the implications for QSEs and EMEs?
      the option will be recognised as voting rights held by black
      people; and                                                        Ownership is weighted as contributing 25 points under the QSE
                                                                         scorecard. In addition, the secondary targets for black women and
      the value of any economic interest irrevocably transferred
                                                                         certain other categories of black people applicable under the generic
      and paid to the (black) holder of the option for the duration
                                                                         scorecard, are not applicable to QSEs, although 2 bonus points are
      of the option period prior to the exercise of the option will be
                                                                         awarded for black women participation.
      considered to be economic interest held by black people; and




4     THE MANAGEMENT CONTROL ELEMENT OF BEE


4.1 How is management control measured under the Codes?

Management control is weighted as contributing 10 points under           This scorecard differs depending on whether the business being
the generic scorecard and 25 points under the QSE scorecard.             measured is QSE or not.
Management control is regulated in terms of Code 200 and is
measured using a management control scorecard.


The following management control scorecard applies to non-QSEs:

Management control indicator                                                              Weighting points                Compliance target
Board participation
Exercisable voting rights of black board members adjusted using the adjusted               3                              50%
recognition for gender

Black executive directors adjusted using the adjusted recognition for gender               2                              50%
Top management
Black senior top management adjusted using the adjusted recognition for gender             3                              40%
Black other top management adjusted using the adjusted recognition for gender              2                              40%
Bonus points
Black independent non-executive board members                                              1                              40%



The following management control scorecard applies to QSEs:
Management control indicator                                                              Weighting points                Compliance target
Black representation at top-manager level                                                  25                              50.1%
Bonus points
Black women representation as top-managers                                                 2                               25%


                                                                                        Cliffe Dekker Hofmeyr THE WAY TO BEE            l 18
4.2    What constitutes a board?                                       who are also ordinary employees of the measured entity, typically
                                                                       employed as executive managers.
In the context of a company, the board is made up of those persons
elected by the shareholders to serve as board members. In the case     4.4   What is meant by top management?
of other forms of enterprise, the board would be the owner
representative body.                                                   The Codes state that this term is to be interpreted by reference to
                                                                       form EEA9 of the regulations issued under the Employment
4.3    What is meant by executive board members?                       Equity Act (the EEA).

Executive board members are those persons serving on the board         That document contains the following table:




Semantic scale                                                                    Paterson                Peromnes       Hay

Top management                                                                    F     F                 1++
                                                                                                          1+
Senior management                                                                 E     E                 1                1
                                                                                        UPPER             2                2
                                                                                        E                 3
                                                                                        LOWER
Professionally qualified, experienced specialists and mid-management              D     D                 4                3
                                                                                        UPPER             5                4
                                                                                        D                 6
                                                                                        LOWER
Skilled technical and academically qualified workers, junior management,          C     C                 7                5
supervisors, foremen, superintendents                                                   UPPER             8                6
                                                                                        C                 9                6A
                                                                                        LOWER            10                7
                                                                                                         11                8
                                                                                                         12
Semi-skilled and discretionary decision making                                    B     B                13                9
                                                                                        UPPER            14               10
                                                                                  B     B                15               11
                                                                                        LOWER            16
Unskilled and defined decision making                                             A     A                17               12
                                                                                                         18               13
                                                                                                         19

Other than the vague reference to EEA9, the Codes do provide the             appointed by or on the authority of the board to undertake the
following clearer descriptions:                                              day-to-day management of that measured entity and who:

"Senior top management" is defined as being employees of a                   • have individual responsibility for the overall management
measured entity who are:                                                       and for the financial management of that measured entity;
      members of the occupation category of "top management"                   and
      as determined using the EE Regulations as qualified in a               • are actively involved in developing and implementing the
      sector code;                                                             measured entity's overall strategy.


19 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
Common examples of senior top management stated in the Codes                Given that top management under Code 200 and senior management
are, chief executive officers, chief operating officers and chief           under Code 300 both account for 5 points of the total scorecard,
financial officers.                                                         there is little benefit in choosing either approach, save that an
                                                                            enterprise that includes its senior management (as defined under
The Codes provide that other top management positions include               the employment equity scorecard) for purposes of the management
chief information officer, the head of marketing, the head of sales,        control scorecard, would appear to be disadvantaged by not being
the head of public relations, the head of transformation, the head of       able to score for senior management again under the employment
human resources and other people holding similar positions.                 equity scorecard, resulting in a deficit of 5 points on the latter
                                                                            sorecard.
4.5   What is adjusted recognition for gender?
                                                                            If an enterprise does not distinguish between senior top management
The adjusted recognition for gender is measured in all categories           and other top management, then top management is measurable as
under management control, except for non-executive independents             a single indicator with a weighting of 5 points.
for large entities when calculating the bonus point. The basis of the
calculation is such that the full points allocation for any category        4.8   How are the bonus points awarded?
in the management scorecard is only possible if black women account
for 50% or more of black people in that measurement category. This          Points are awarded against the level of black representation among
effectively ensures that all targets in the scorecard include a secondary   non-executive independent directors, as defined in the King Report
target of 50% for black women.                                              on Corporate Governance for South Africa. This bonus point is
                                                                            probably only relevant to public companies listed on the JSE, or
4.6   How is board participation measured?                                  large unlisted public or private companies. The bonus point does
                                                                            not apply to the QSE management control scorecard.
Points are awarded for the voting rights held by black people on the
board and the level of black representation among executive directors.      4.9   How are the QSE management control points awarded?
Both elements are measured using the adjusted recognition for
gender.                                                                     25 points are awarded against a targeted level of 50.1% black top
                                                                            management participation. The calculation for adjusted recognition
4.7   How is top management participation measured?                         for gender is not applied but 2 bonus points are awarded for a
                                                                            targeted level of 25% black women representation in top
Points are awarded for the level of black representation among              management.
senior top management, and the level of black representation among
other top management. The adjusted recognition for gender calculation       The QSE management control scorecard is considerably less onerous
applies.                                                                    than the management control scorecard applicable to non-QSEs.


If an enterprise does not have a category of management which is
the equivalent of top management or does not distinguish between
top management and senior management, then it may include its
senior management for purposes of the senior top management
indicator using the corresponding targets in employment equity
score card contained in Code 300, Statement 300 for senior
management.




                                                                                           Cliffe Dekker Hofmeyr THE WAY TO BEE          l 20
 5     THE EMPLOYMENT EQUITY ELEMENT OF BEE

5.1    How is employment equity measured under the Codes?              Economically Active Population targets) and 25 points under the
                                                                       QSE scorecard (plus 2 bonus points). The manner in which businesses
The employment equity element of BEE is measured using an              attain points for employment equity is set out in Code 300 (for non-
employment equity scorecard. This scorecard differs depending on       QSEs) and Code 800, Statement 803 (for QSEs). Two sets of five-
whether the business being measured is a QSE or a non-QSE. A           year period targets apply to each code. Employment equity is
business that is being measured can score a total of 15 points under   strongly aligned with the provisions of the EEA.
the generic scorecard (plus 3 bonus points for achieving the

 The following employment equity scorecard applies to non-QSEs:
Criteria                                                                         Weighting points             Compliance targets
                                                                                                              years 0 - 5     years 6 -10

 Black employees of the measured entity who are disabled                         2                            2%              3%
 employees as a percentage of all employees adjusted
 using the adjusted recognition for gender

 Black employees of the measured entity who are in the                           5                            43%             60%
 measurement category of senior management as a percentage
 of all employees in that measurement category adjusted
 using the adjusted recognition for gender

 Black employees of the measured entity who are in the                           4                            63%             75%
 measurement category of middle management as a percentage
 of all employees in that measurement category adjusted
 using the adjusted recognition for gender

 Black employees of the measured entity who are in the                           4                            68%             80%
 measurement category of junior management as a
 percentage of all employees in that measurement
 category adjusted using the adjusted recognition for gender

 Compliance with the EAP                                                         3


 The following employment equity scorecard applies to QSEs:
Criteria                                                                         Weighting points             Compliance targets
                                                                                                              years 0 - 5     years 6 -10
 Black employees of the measured entity who are management as a                  15                           40%             60%
 percentage of all management adjusted using the adjusted
 recognition for gender

 Black employees of the measured as a percentage of all employees                10                           60%             70%
 adjusted using the adjusted recognition for gender

 Bonus Point for meeting or exceeding the EAP targets in
 each category above



21 l    Cliffe Dekker Hofmeyr THE WAY TO BEE
5.2   How are the terms used in the non-QSEs employment                    Stated differently, to commence scoring in either the first or second
      equity scorecard defined?                                            five-year period, a sub-minimum of 40% must be achieved on each
                                                                           of the targets of the respective non-QSE and QSE employment
All of the terms, other than "disabled person", used in the non-QSE        equity scorecards.
employment equity scorecard are defined by reference to certain
forms that form part of the regulations under the EEA. Please see          The Interpretive Guide indicates that the actual performance
our comments on form EEA9 under paragraph 4.4 above.                       requirement is intended to be measured using the adjusted recognition
                                                                           for gender. On the example above, the actual effect of the 40% sub-
The EEA has been in operation for some time now and most                   minimum is such that a non-QSE would need 17.2% black people
businesses have had to become compliant with the EEA. Most                 consisting of 8.6% black women to start scoring points.
businesses would also by now have submitted regular reports based
on their employment equity plans to the SA Department of Labour            5.4   What about the non-QSE bonus points?
detailing the demographics of their staff members.
                                                                           The Economically Active Population (EAP) is defined as being the
This reporting is done on the basis of the occupational levels specified
                                                                           "Economically Active Population as determined and published by
in form EEA9. The simplest answer to this question of definition
                                                                           Statistics South Africa. The applicable EAP for the purposes of
would be to say that "black persons" and "black women" in the
                                                                           any calculation under the Codes will be the most recently
various occupational levels listed in the scorecard would be those
                                                                           published EAP".
persons reported on in the racial categories of African, Coloured
and Indian in the employment equity report of a business. That
                                                                           If companies demonstrate compliance levels at those of the EAP,
assumption is based on companies that have accurately allocated
                                                                           they qualify for 2 bonus points.
their staff between the racial categories and the various occupational
levels but surprisingly, not many companies have. The added concern
                                                                           This provision encourages companies to target true demographic
is that the necessity to comply with the EEA depends on certain
                                                                           representation and although it lacks clarity in certain respects, one
criteria, in particular the number of employees a company has and
                                                                           thing is clear: both the EAP and black women representation are
the annual turnover of the business operating in specific industries
                                                                           crucial issues that no company can afford to ignore.
or sectors.

The term "disabled people" may be interpreted by reference to              5.5   What are the implications for QSEs/EMEs?
paragraph of the "Code of Good of Practice on the Employment of
People with Disabilities" issued in terms of section 54(1)(a) of the       The QSE employment equity scorecard is far less onerous than the
EEA. Section 1 of the EEA defines people with disabilities as "people      employment equity scorecard applicable to non-QSEs and only
who have a long-term or recurring physical or mental impairment,           differentiates between management employees and other employees.
which substantially limits their prospects of entry into, or advancement   Since the provisions of the EEA relating to the occupational levels
in, employment."                                                           and the reporting in respect of racial composition of each occupational
                                                                           level is not applicable to many QSEs (as designated employers as
The employment equity scorecards for both non-QSEs and QSEs,               defined in EEA), the QSE employment equity scorecard will have
focus on and embed the adjusted recognition for gender calculation         the effect of extending the application and ambit of EEA to QSE
referred to in paragraph 4.5.                                              employers to which it has not previously applied.

5.3   What is the 40% sub-minimum?

In respect of each of the measurement categories in the employment
equity scorecard for large companies, a sub-minimum of 40% of
the target applies. This means that if a non-QSE fails to meet 40%
of their target for senior management (ie. 43%) for the first five-
year period (ie 17.2%), it will score 0 for that measurement category.


                                                                                           Cliffe Dekker Hofmeyr THE WAY TO BEE            l 22
6      THE SKILLS DEVELOPMENT ELEMENT OF BEE

6.1    How is skills development measured under the Codes?              A non-QSE can score a total of 15 points under the generic scorecard
                                                                        and a QSE can score 25 points under the QSE scorecard. The manner
The skills development element of BEE is measured by using a            in which businesses attain points for skills development contributions
skills development scorecard. Different scorecards would be used,       are set out in Code 400 (for non-QSEs) and Code 800, Statement
depending on whether the measured entity is a non-QSE or a QSE.         804 (for QSEs).

The following skills development scorecard applies to non-QSEs:
Skills development element                                                        Weighting points              Compliance target
Skills development spend on learning programmes identified
on the learning programme matrix
Skills development spend on learning programmes for black employees               6                               3%
as a percentage of leviable amount using the adjusted recognition
for gender.

Skills development spend on learning programmes for black employees               3                               0.3%
with disabilities as a percentage of leviable amount using the
adjusted recognition for gender

Learnerships

Number of black employees participating in in-service training                    6                               5%
programmes as a percentage of total employees using the
adjusted recognition for gender


The following skills development scorecard applies to QSEs:
Skills development element                                                        Weighting points              Compliance target
Adjusted skills development spend on learning programmes for                      25                            2%
black employees as a percentage of leviable amount.



6.2    Key requirements                                                 Priority skills are defined as:
                                                                             skills that (1) are value-adding to the activities of company
It should be stressed that the Codes are very clear. There is no             in line with its core business in areas, or (2) it cannot
recognition and therefore no points for any skills development unless        outsource, or (3) are within the production/operational
a company:                                                                   part of the company's value-chain (Core Skills); or

      complies with the provisions of the Skills Development Act             skills identified as being critical by any SETA (Critical
                                                                             Skills); and
      and Skills Development Levies Act;
                                                                             skills identified as being scarce by any SETA (Scarce Skills);
      is registered with the relevant SETA;
                                                                             as well as
      has developed a Workplace Skills Plan; and
                                                                             any skills specifically identified:
      has employed programmes aimed at developing Priority Skills            • in a Sector Skills Plan issued by the SA Department of
      generally, and specifically, for black employees.                        Labour; and
                                                                             • by the JIPSA established as part of the ASGISA.


23 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
6.3     What is SETA?                                                        6.4    What is the learning programme matrix?

SETA is a Sector Education and Training Authority established by             The Learning Programme Matrix (the LPM) is attached to Code
section 9(1) of the Skills Development Act having jurisdiction over          400 and is an extremely useful document.
measured entities.                                                           As we understand the purpose of the LPM, only learning programmes
                                                                             listed on that matrix will be recognised as skills development. The
                                                                             limitation of recognition referred to at 6.10 should be noted.

The Learning Programme Matrix:
Category                                     Narrative description           Learning site                Learning achievement
                                             delivery mode
Skills development spend on learning programmes identified on the LPM:

A     Institution-based theoretical          Institutional instruction       Institutions such as         Recognised theoretical knowledge
      instruction alone - formally                                           universities and colleges,   resulting in the achievement of a degree,
      assessed by the institution                                            schools, ABET providers      diploma or certificate issued by an
                                                                                                          accredited or registered formal
                                                                                                          institution of learning

B     Institution-based theoretical          Mixed mode delivery with        Institutions such as         Theoretical knowledge and workplace
      instruction as well as some            institutional instruction as    universities and colleges,   experience with set requirements
      practical learning with an             well as supervised learning     schools, ABET providers      resulting in the achievement of a degree,
      employer or in a simulated             in an appropriate               and workplace                diploma or certificate issued by an
      work environment - formally            workplace or simulated                                       accredited or registered formal
      assessed through the institution       work environment                                             institution of learning

C     Recognised or registered               Structured learning in the      Workplace                    Occupational or professional knowledge
      structured experiential learning       workplace with mentoring                                     and experience formally recognised
      in the workplace that is required      or coaching                                                  through registration or licensing
      after the achievement of a
      qualification - formally assessed
      by a statutory occupational or
      professional body

D     Occupationally-directed                Institutional instruction       Institution and workplace    Theoretical knowledge and workplace
      instructional and work-based           together with structured,                                    learning, resulting in the achievement
      learning programme that requires       supervised experiential                                      of a SA Qualifications Authority
      a formal contract - formally           learning in the workplace                                    registered qualification, a certificate or
      assessed by an accredited body                                                                      other similar occupational or
                                                                                                          professional qualification issued by an
                                                                                                          accredited or registered formal
                                                                                                          institution of learning
E     Occupationally-directed                Structured, supervised          Workplace and some           Credits awarded for registered unit
      instructional and work-based           experiential learning in the    institutional as well as     standards
      learning programme that does not       workplace which may             ABET providers
      require a formal contract - formally   include some institutional
      assessed by an accredited body         instruction

F     Occupationally-directed informal       Structured information          Institutions, conferences    Continuing professional development,
      instructional programmes               sharing or direct instruction   and meetings                 attendance certificates and credits
                                             involving workshops,                                         against registered unit standards (in
                                             seminars and conferences                                     some instances)
                                             and short courses
G     Work-based informal programmes Informal training                       Workplace                    Increased understand of job or work
                                                                                                          context or improved performance or skills


                                                                                              Cliffe Dekker Hofmeyr THE WAY TO BEE            l 24
6.5    What is ABET?                                                     can be provided. In the event that an independent written certificate
                                                                         cannot be provided, the programme may still qualify as a certified
ABET refers to Adult Basic Education and Training as determined          programme if an enrolment certificate can be issued by an
by the National Qualifications Authority. Skills development spend       independent person, confirming the employees progress. Even
on such programmes will be multiplied by 1.25 thus allowing the          though no certification is available, a programme may still qualify
measured entity certain enhanced recognition on the scorecard. In        for skills development purposes.
other words, should a measured entity spend R10,000 for sending
a black employee on an ABET programme, its recognisable spend            6.9   What is a "learnership"? A look into in-service
will be R10,000 multiplied by 1.25, being R12,500.                             training programmes

6.6    How is the term "spend" defined?                                  A "learnership" is a form of internship provided for in the Skills
                                                                         Development Act. Learnerships are approved by the relevant SETA
A spend is any lawful expense paid for any learning programme            and are generally fully certified in accordance with the National
listed in the LPM which can be proved by an invoice or an appropriate    Qualifications Framework maintained in terms of SA Qualifications
internal accounting record.                                              Authority Act.

Such lawful expenses include:
                                                                         Learnerships carry significant tax benefits under the Income Tax
      costs of training materials;                                       Act. For more information concerning learnerships, readers are
      costs of trainers;                                                 advised to contact their SETA.

      costs of training facilities including costs of catering;
                                                                         Certain non-learnership training programmes may be regarded as
      scholarships and bursaries (but recognition is qualified as        learnerships for the particular purposes of Code 400, but it would
      per paragraph 6.10 below);
                                                                         not qualify for recognition for the purposes of the Skills Development
      course fees;                                                       Act. These are category B, C or D learning programmes as set out
      accommodation and travel; and                                      in the LPM.

      administration costs such as organisation of training including,
                                                                         A key provision that should be noted is that the full salary paid
      cost of a skills development facilitator or a training manager.
                                                                         to an employee participating as a learner in a learnership or a
                                                                         category B, C or D learning programme constitutes skills
6.7    What about salaries and wages?
                                                                         development spend.

Salaries and wages of employees participating as learners in any
                                                                         6.10 Dealing with bursaries and scholarships
learning programme will only be regarded as skills development
expenses if the learning programme is a learnership or if it falls
                                                                         Bursaries and scholarships are not regarded as skills development
within category B, C or D of the LPM.
                                                                         spend if the company is able to recover any portion from the recipient
                                                                         thereof or if the company sets conditions regarding the furnishing
6.8    Learning programme certification
                                                                         of the bursary or scholarship, other than conditions of the following
                                                                         nature:
Certified programmes will be recognised if proof in the form of an
invoice can be submitted. Uncertified programmes and category G
                                                                               that the employee successfully complete the studies within
learning programmes (under the LPM) will be limited to a maximum
                                                                               the time period provided; or
of 15% recognition of total skills development spend.
                                                                               that the employee be required to continue employment
A certified programme is where an independent written certificate,             with the company for a period not more than the period of
as prescribed by the "Learning Achievements" column of the LPM                 the studies.



25 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
6.11 Did you forget the adjusted recognition for gender?                 6.12 What are the implications for QSEs/EMEs?

The adjusted recognition for gender, referred to in paragraph 4.5,       The QSE skills development scorecard is considerably less onerous
also applies to skills development spend and the calculation of points   than the skills development scorecard applicable to non-QSEs.
for learnerships and learning programmes. This emphasises the
value in employing black women at every level of the measured entity.




7     THE PREFERENTIAL PROCUREMENT ELEMENT OF BEE

7.1   What is preferential procurement under the Codes?                  Points are scored by measuring the extent to which procurement
                                                                         spend meets the compliance targets set out in the preferential
According to the DTI, preferential procurement is the mechanism          procurement scorecard. Preferential procurement counts for a total
used to drive transformation in the economy by encouraging               of 20 points under the generic scorecard and 25 points under the
procurement only from suppliers that are compliant with the              QSE scorecard.
scorecards contained in the Codes. Accordingly, particular suppliers
are to be preferred based on the extent of their compliance with         Points are awarded in three beneficiary categories as follows:
the Codes.
                                                                              BEE compliant suppliers (Category A Beneficiaries)
                                                                              12 points;
The preferential procurement element of BEE is measured under
the preferential procurement scorecard (Code 500). The preferential           QSE and EME suppliers (Category B Beneficiaries)
procurement of QSEs is measured under the preferential procurement            3 points; and
scorecard for QSEs (Code 800 Statement 805).
                                                                              50% black owned and 30% black women owned suppliers
As in the case of the Employment Equity Scorecard, compliance is              (Category C Beneficiaries)
measured over a 10-year period broken up into two consecutive                 5 points (3 points for 50% black-owned suppliers and
five-year periods.                                                            2 points for black woman-owned suppliers).



The preferential procurement scorecard for non-QSEs is set out below:

Criteria                                                                          Weighting points             Compliance targets
                                                                                                               years 0 - 5     years 6 -10

BEE procurement spend from all suppliers based on the BEE procurement             12                           50%             70%
recognition levels as a percentage of total measured procurement spend

BEE procurement spend from QSEs or from EMEs based on the applicable              3                            10%             15%
BEE procurement recognition levels as a percentage of total measured
procurement spend

BEE procurement spend from any of the following suppliers as a                    5                            15%             20%
percentage of total measured procurement spend:

      suppliers that are more than 50% black owned regardless
      of their BEE procurement recognition level; or
      suppliers that are more than 30% black women owned
      regardless of their BEE procurement recognition level.


                                                                                        Cliffe Dekker Hofmeyr THE WAY TO BEE          l 26
The QSE preferential procurement scorecard is as follows:

Criteria                                                                          Weighting points              Compliance targets
                                                                                                                years 0 - 5      years 6 -10

BEE Procurement Spend from all Suppliers based on the BEE                         25                           40%              50%
Procurement Recognition Levels as a percentage of
Total Measured Procurement Spend



7.2    What is Total Measured Procurement Spend and how                       all goods and services that are imported or procured from a
       is it measured?                                                        non-SA source subject to exclusions referred to below; and
                                                                              goods and services procured between intra group companies.
Total Measured Procurement Spend (TMPS) is that part of total
procurement spend which is specifically recognised under the             The following categories of expenditure are excluded from the
preferential procurement scorecard. To determine TMPS certain            calculation of TMPS:
categories of expenditure are specifically excluded.
                                                                              taxation and levies imposed by an organ of state, including
The following categories of procurement expenditure are included              rates imposed by a municipality or other local government;
within TMPS:                                                                  all public sector procurement (other than goods or services
      all goods and services procured that comprise cost of sales;            procured from local government acting as a reseller) from
                                                                              organs of state and public entities listed in schedule 1 of the
      all goods and services procured that comprise operational
                                                                              PFMA and generally all procurement from organs of state or
      expenditure;
                                                                              public entities that enjoy statutory or regulatory monopoly;
      all capital expenditure incurred;
                                                                              salaries, wages, remuneration and emoluments paid to
      all goods and services procured from public entities and organs         employees and directors;
      of state listed in schedules 2 and 3 to the PFMA;
                                                                              investments in or loans to an associated enterprise;
      all goods and services procured from suppliers that enjoy a
                                                                              investments, loans or donations qualifying for recognition
      monopolistic position;
                                                                              under the enterprise development scorecard and the socio-
      all procurement for a third party or a client, where the cost of        economic development scorecard;
      that procurement is an expense recorded in the annual financial
                                                                              pass through third party procurement (where the cost of that
      statements;
                                                                              procurement is an expense not recorded in the financial
      any procurement which is outsourced labour expenditure                  statements); and
      (ie labour brokers and independent contractors);
                                                                              the following imported goods and services:
      payments made to any post retirement funding scheme or to
                                                                              • imported capital goods or components for value-added
      a medical aid or similar medical insurer for employees,
                                                                                production in South Africa, provided there is no existing
      excluding any portions of such payments which are a
                                                                                local production of such capital goods or components, and
      contribution to a capital investment of the employee;
                                                                                importing those capital goods or components promotes
      any commissions or similar payments payable to any other                  further value-added production within South Africa;
      person pursuant to the business or trade of the company;
                                                                              • imported goods and services other than those listed above,
      all goods and services procured in carrying out BEE but                   if there is no local production of those goods or services
      excluding contributions taken into account under the enterprise           including, but not limited to, imported goods or services that
      development scorecard and the socio-economic development                  carry a brand different to the locally produced goods or
      scorecard (although expenditure incurred in facilitating such             services, or have different technical specifications to the
      contributions are allowed);                                               locally produced goods or services.


27 l       Cliffe Dekker Hofmeyr THE WAY TO BEE
A list of the public entities listed in the various schedules to the   Entities listed under schedule 3 - Other Public Entities
PFMA, is set out below.                                                (expenditure included in TMPS). This schedule is divided into
                                                                       various parts and is extremely lengthy. What follows are a few
Entities listed under schedule 1 (expenditure excluded from TMPS)      indicative extracts:

      Commission for Gender Equality                                        All the SETAs
      Commission for the Promotion and Protection of the Rights             Accounting Standards Board
      of Cultural, Religious and Linguistic Communities
                                                                            Commission for Conciliation, Mediation and Arbitration
      Human Rights Commission                                               Competition Commission
      Financial and Fiscal Commission                                       Competition Tribunal
      Independent Broadcasting Authority                                    Education and Labour Relations Council
      Independent Communications Authority of South Africa                  Estate Agency Affairs Board

      Independent Electoral Commission                                      Film and Publication Board

      Municipal Demarcation Board                                           Financial Services Board

      Pan South African Language Board                                      Human Sciences Research Council
                                                                            National Consumer Tribunal
      Public Protector
                                                                            National Credit Regulator
Entities listed under schedule 2 - Major Public Entities                    National Development Agency
(expenditure included in TMPS)
                                                                            National Economic, Development and Labour Council
      Air Traffic and Navigation Services Company                           National Energy Regulator of South Africa
      Airports Company of South Afica (ACSA)                                National Lotteries Board
      Alexkor Ltd                                                           National Nuclear Regulator
      Armaments Corporation of South Africa                                 SA Heritage Resources Agency
      CEF (Pty) Ltd                                                         SA Heritage Resources Agency, Cape Town
      Denel                                                                 SA Local Government Association
      Development Bank of Southern Africa                                   SA Maritime Safety Authority
      Eskom                                                                 SA Medical Research Council
      IDC Ltd                                                               SA National Accreditation System
      Independent Development Trust                                         SA National Roads Agency

      Land and Agricultural Bank of South Africa                            SA Nuclear Energy Corporation

      SA Broadcasting Corporation                                           SA Qualifications Authority

      SA Forestry Company Ltd                                               SA Revenue Service

      SA Nuclear Energy Corporation                                         SA National Parks

      SA Post Office Ltd                                                    Unemployment Insurance Fund

      Telkom SA Ltd                                                         Universal Service Agency

      Trans-Caledon Tunnel Authority                                        Any subsidiary or entity under the ownership control of the
                                                                            above public entities
      Transnet Ltd


                                                                                       Cliffe Dekker Hofmeyr THE WAY TO BEE l 28
7.3    What are the BEE procurement recognition levels                  Finally, enhanced recognition is given to procurement spend on
       referred to in the preferential procurement scorecards?          professional service providers (eg lawyers, engineers, accountants,
                                                                        etc.) and enterprises who are more than 50% black-owned by
The BEE procurement recognition level refers to the percentage of       recognising 125% of the procurement spend.
procurement spend that may be recognised as being BEE compliant
for the purposes of measuring preferential procurement. These are       7.5    How is the score for preferential procurement
based on the compliance levels in the scoring matrix contained at              calculated?
paragraph 2.5 (scoring matrix).
                                                                        Calculations are done in terms of formulae provided in Annexe 500
For example, if legal services are procured from a legal service        (A) and 500 (B) to Code 500. In broad summary, they work as
provider with a Level 3 BEE contributor status then 110% of the         follows:
amount spent can be taken into account when determining BEE
procurement spend.                                                             TMPS is established by including and excluding, respectively,
                                                                               those expense items referred to in paragraph 7.2;
All EMEs have a deemed recognition level of 100%. In other words,
Level 4 contributors to BEE and if they are in excess of 50% black             the amount spent on each individual supplier is multiplied
owned, qualify for a deemed recognition level of 110% (Level 3                 by (i) that supplier's BEE recognition level and, (ii) where
contributors to BEE).                                                          relevant, that suppliers enhanced recognition multiple
                                                                               (referred to in paragraph 7.4 above) to determine the Rand
The procurement spend on suppliers who are non-compliant                       value of BEE procurement spend; and
contributors (viz those who score less than 30% on the scoring
matrix) cannot be taken into account in determining the procurement            each supplier is then allocated to its beneficiary category as
score under Category A Beneficiaries but may be recognised under               referred to in paragraph 7.1.6 and each supplier's BEE
Category B or Category C Beneficiaries.                                        procurement spend is added together for each beneficiary
                                                                               category. A supplier may fall into more than one beneficiary
7.4    Are there any preferential procurement bonus points?                    category.

There are no bonus points per se but there are other forms of           The total BEE spend for each category is then tallied to derive the
enhanced recognition.                                                   Total BEE Procurement Spend (TBPS) for each beneficiary category.
                                                                        Each beneficiary category TBPS is calculated as a percentage
The first is in respect of so-called "value-adding suppliers" that      of TMPS and the resultant percentage is then:
qualify for enhanced recognition of 125% of the actual value of
procurement. A value-adding supplier is rather mysteriously defined     (i)    divided by the compliance target percentage for the five-year
as an entity which is registered for VAT and whose net profit before           period in question and then
tax summed with its total labour cost exceeds 25% of the value of
its total revenue. In the Interpretive Guide value-adding suppliers     (ii)   multiplied by the weighting points applicable to that beneficiary
                                                                               category to determine a score for each beneficiary category.
are described as suppliers that benefit or add value to raw materials
and tend to manufacture and produce locally rather than relying too     The scores for all three beneficiary categories are then tallied to
heavily on imports.                                                     determine the total score out of 20.

Secondly, if a measured enterprise procures goods and services from
a supplier that is also a recipient of enterprise development
contributions from that measured entity, then 120% of that
procurement spend can be recognised. This is an effort to incentive
sustainable enterprise development contributions.




29 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
The following model demonstrates the application of the preferential procurement scorecard

Example of the application of the preferential procurement calculation:

SA personal services firm is not a QSE or an EME and procures R1 million TMPS of goods and services from 10 suppliers every
year. Of those suppliers:

Supplier 1    scores 53 points on the generic scorecard and also a value adding enterprise and supplies goods with a value of R250,000

Supplier 2    scores 63 points on the generic scorecard, is a QSE which is also 50% black owned and supplies goods with a value of
              R30,000

Supplier 3    scores 32 points on the generic scorecard and supplies goods with a value of R300,000 - supplier 3 is a black-owned
              professional service provider

Supplier 4    scores 28 points on the generic scorecards and is more than 30% owned by black women and supplies goods to the
              value of R60,000

Supplier 5    is an EME supplying goods to the value of R20,000

All of the remaining suppliers score less than 30 points on the generic scorecard, and do not qualify as Category B or Category C
Beneficiaries or 30% black women owned enterprises (and so are regarded as non compliant BEE contributors and the procurement
spend on these suppliers is not taken into account in determining TBPS).

SA personal services firm is thus able to recognise:

Supplier 1    60% x R250,000 x 1.25 = R187,500 (supplier 1 is a level 6 contributor to BEE)

Supplier 2    100% x R30,000 = R30,000 (supplier 2 is a level 5 contributor to BEE but is entitled to claim level 4 status as it
              is 50% black owned)

Supplier 3    10% x R300,000 x 1.25 = R37,500 (supplier 3 is a level 8 contributor to BEE and because its is a black owned
              professional service provider it qualifies for enhanced recognition)

Supplier 4:   the full R60,000 is recognised as it more than 30% black women owned even though it is regarded as a non-compliant
              BEE contributor under the scoring matrix

Supplier 5    the full R20,000 is recognised as an EME is deemed to be a level 4 contributor




                                                                                      Cliffe Dekker Hofmeyr THE WAY TO BEE           l 30
SA personal services firm can claim TBPS as follows:

The Category A Beneficiary TBPS is the sum of R255,000 (R187,500 + 30,000 + 37,500) providing a score of 6.12 out of a maximum
of 12 points calculated as follows:

   R255 000
            x 100
  R1,000,000               x 12
     50

 = 6.12
The Category B Beneficiary TBPS is the sum of R50,000 (R30,000 + R20,000) providing a score of 1.5 out of a maximum of 3 points
calculated as follows:


   R50,000
             x 100
  R1,000,000               x3
         10

 = 1.5
The Category C Beneficiary TBPS is R127,500 (R30,000 + R37,500 + R60,000) divided into R67,500 TBPS from 50% black owned
suppliers and R60,000 TBPS from black woman owned suppliers providing a score of 2.025 for black owned suppliers and 2 points
for black women owned suppliers, calculated as follows:

 Black owned suppliers                                               Black women owned suppliers

  R67,500                                                               R60 000
            x 100                                                                 x 100
 R1,000,000                x3                                          R1,000,000               x2
        10                                                                    6

 = 2.025                                                               =2
SA Personal Service firm can claim 11.645 points out of a maximum of 20 points under the preferential procurement
scorecard.




7.6    What are the implications for QSEs/EMEs?                         7.7   What about procurement by the public sector?

The QSE preferential procurement scorecard is considerably less         Public sector procurement is governed by the Preferential
onerous than that which is applicable to non-QSEs. The fact that        Procurement Policy Framework Act, 2000 (the PPPFA). Draft
non-QSEs are required to procure 10% of total measured procurement      regulations have been issued which seek to align the PPPFA.
by value from QSEs or EMEs is a significant gain for the smaller
business environment.                                                   These amended regulations have yet to be finalised.




31 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
8     The enterprise development element of BEE

8.1   What is enterprise development?                                   8.2   How are enterprise development contributions
                                                                              measured under the Codes?
Enterprise development, as the name implies, relates to contributions
(monetary or non-monetary) actually initiated and implemented in        Enterprise development constitutes 15 points under the generic
favour of assisting or accelerating the development, sustainability     scorecard and 25 points under the QSE scorecard. Enterprise
and ultimate financial and operational independence of beneficiary      development contributions to BEE are calculated under the enterprise
enterprises. While it is primarily aimed at black owned QSEs and        development scorecard (Code 600). QSE enterprise development
EMEs, other larger entities can also benefit provided they are at       contributions are measured under the QSE scorecard (Code 800,
least in part black owned.                                              Statement 806).


The Enterprise Development Scorecard is as follows (non-QSE):
Criteria                                                                                                        Weighting points
Average annual value of all qualifying contributions made by the measured entity measured                        15
from the commencement of this statement or the inception date to the date of
measurement as a percentage of the target


The Enterprise Development Scorecard for QSE is as follows:
Criteria                                                                                                        Weighting points
Average annual value of all qualifying contributions made by the measured entity                                25
measured from the commencement of this statement or the inception date to
the date of measurement as a percentage of the target


8.3   The targets                                                       The QSE target is 2% of NPAT.

The target under the enterprise development scorecard is 3% of net      These targets are to be met every year for the duration of the Codes.
profit after tax (NPAT). However, in the case of entities:              In instances where a measured entity has sustained records of above
that have not achieved a profit in the last year or, on average over    "industry norm" average NPAT, applying the formula to measure
five years, or whose net profit margin is less than a quarter of the    that entity's points would appear to be a relatively simple matter.
industry norm, the target is 3% times indicative profit margin (being   It appears that the intention is to ensure that companies do not benefit
the profit margin (NPAT/Turnover) in the last year where the            from under-reporting on their profitability making the achievement
company's profit margin is at least one quarter of the industry norm)   of the target relatively easy. Unfortunately, the mechanism provided
x Turnover).                                                            by the Codes to address this mischief is needlessly opaque. In all
                                                                        instances where measured enterprises have generated no profit, or
There is no indication of how the industry norm is to be determined     no profit on average over five years, or "marginal profits", the
nor any indication of when the turnover target is actually meant to     application of the formula provided will prove to be a significant
be applied.                                                             challenge.

We have used "or" between the above points, but it is unclear from
the enterprise development scorecard whether turnover applies when      8.4   What is the significance of the "commencement/
both conditions are present or either of them are present. It seems           inception date"?
to be implied that a notional profit derived from turnover
                                                                        Special provision is made to recognise as enterprise development
must be applied in either one or both of the instances referred
                                                                        contributions any historical initiatives undertaken by measured
to above.
                                                                        entities. There are a number of SA businesses and multinationals


                                                                                         Cliffe Dekker Hofmeyr THE WAY TO BEE l 32
operating in South Africa that have undertaken enterprise development            preferential terms granted by a measured entity in respect of
since the early 1980's. As such, the intent by the DTI to allow                  its supply of goods or services to beneficiary entities:
businesses to recognise historical enterprise development contribution
                                                                                 contributions made to settling service costs relating to the
is laudable. The DTI has limited this recognition by providing that
                                                                                 operational or financial capacity or efficiency levels of
where the inception date is chosen by the measured entity, this
                                                                                 beneficiary entities;
earlier date may not be more than five years prior to the
commencement date of the Codes.                                                  payments made by the measured entity to third parties to
                                                                                 perform enterprise development on the measured
Enterprise development contributions are recognised on a cumulative              entity's behalf;
basis and may be measured either from the date of commencement of
the Codes (commencement date) or the abovementioned inception date.              discounts given to beneficiary entities in relation to the
                                                                                 acquisition and maintenance costs associated with the grant
                                                                                 to those beneficiary entities of franchise, licence, agency,
8.5    Which businesses can a measured business make
                                                                                 distribution or other similar business rights;
       enterprise development contributions to?
                                                                                 the creation or development of capacity and expertise for
The following businesses can be beneficiaries (Qualifying                        beneficiary entities needed to manufacture or produce goods
Beneficiaries) of enterprise development contributions:                          or services previously not manufactured, produced or provided
                                                                                 in South Africa;
       Category A: involves EMEs or QSEs that are 50% black
                                                                                 facilitating access to credit for beneficiary entities without
       owned or 50% black women owned.
                                                                                 access to similar credit facilities through traditional means
       Category B involves (any size) enterprises that are:                      owing to a lack of credit history, high-risk or lack of collateral;
       • 50% black owned or 50% black women owned; or
       • 25% black owned or 25% black women owned with a                         provision of training or mentoring to beneficiary entities
         BEE status of between level 1 and 6.                                    which will assist the beneficiary entities to increase their
                                                                                 operational or financial capacity;
8.6    What constitutes a contribution to enterprise                             the maintenance by the measured entity of an enterprise
       development?                                                              development unit which focuses exclusively on support of
                                                                                 beneficiary entities or candidate beneficiary entities;
The following examples of enterprise development are provided in
                                                                                 the creation or development of the capacity of beneficiary
the enterprise development scorecard:
                                                                                 entities which will enable them to manufacture and produce
       grant contributions to beneficiary entities;                              goods or provide services previously not available in South
       investments in beneficiary entities;                                      Africa, may constitute an enterprise development contribution;
                                                                                 and
       loans made to beneficiary entities;
                                                                                 new projects promoting beneficiation may constitute an
       guarantees given or security provided on behalf of beneficiaries:         enterprise development contribution.
       credit facilities made available to beneficiary entities;
       direct costs incurred by a measured entity in assisting and         8.7   What is the Benefit Factor Matrix?
       hastening development of beneficiary entities;
                                                                           The benefit factor matrix is provided as a means by which to
       overhead costs of a measured entity directly attributable to
                                                                           determine what types of contributions are recognised and the manner
       enterprise development contributions;
                                                                           of calculating the value of the contribution.
       enterprise development or developmental capital advanced
       to beneficiary entities;                                            This involves multiplying the benefit factor (right hand column)
                                                                           with the contribution amount (middle column).
       preferential credit terms granted by a measured entity to
       beneficiary entities;


33 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
The Benefit Factor Matrix
Contribution type                                               Contribution amount                      Benefit factor
Grant and related contributions
Grant contribution                                              Full grant amount                        100%
Direct cost incurred in supporting enterprise development       Verifiable cost (including both          100%
                                                                monetary and non-monetary)

Discounts in addition to normal business practices supporting   Discount amount (in addition to          100%
enterprise development                                          normal business discount)

Overhead costs incurred in supporting enterprise development    Verifiable costs (including both         80%
(including people appointed in enterprise development)          monetary and non-monetary)

Loans and related contributions

Interest-free loan with no security requirements supporting     Outstanding loan amount                  100%
enterprise development

Standard loan to black owned EME and QSEs                       Outstanding loan amount                  70%

Standard loan provided to other beneficiary enterprises         Outstanding loan amount                  60%

Guarantees provided on behalf of a beneficiary entity           Guarantee amount                         3%

Lower interest rate                                             Outstanding loan amount                  Prime rate - actual rate

Equity investments and related contributions

Minority investment in black owned EME and QSEs                 Investment amount                        100%

Minority investment in other beneficiary enterprises            Investment amount                        80%

Enterprise development investment with lower dividend           Investment amount                        Dividend rate of ordinary
to financier                                                                                             shareholders - actual
                                                                                                         dividend rate of contributor
Contributions made in the form of human resource
capacity

Professional services rendered at no cost and supporting        Commercial hourly rate of professional   80%
enterprise development

Professional services rendered at a discount and supporting     Value of discount based on commercial    80%
enterprise development                                          hourly rate of professional

Time of employees of measured entity productively deployed      Monthly salary divided by 160            80%
in assisting beneficiaries

Other contributions

Shorter payment periods                                         Percentage of invoiced amount            Percentage being 15 days less
                                                                                                         the number of days from
                                                                                                         invoice to payment




                                                                                    Cliffe Dekker Hofmeyr THE WAY TO BEE        l 34
8.8    Are there any bonus points for enterprise development?          8.9   What are the implications for QSEs/EMEs?

There are no bonus points for enterprise development, but              The QSE enterprise development scorecard is considerably less
contributions to Category A Beneficiaries (see paragraph 8.4)          onerous than the enterprise development scorecard applicable to
qualify for 125% recognition against actual value.                     non-QSEs.

                                                                       The fact that black owned QSEs and EMEs can be Qualifying
                                                                       Beneficiaries regardless of their own BEE credentials represents an
                                                                       important benefit for this segment of the economy.




9      THE SOCIO-ECONOMIC DEVELOPMENT ELEMENT OF BEE

9.1    How is the socio-economic development element                   5 points under the generic scorecard and 25 points under the QSE
       measured under the Codes?                                       scorecard.

The socio-economic development element of BEE is measured              The socio-economic development element under the Codes primarily
using a socio-economic development scorecard. This scorecard           relates to corporate social investment and is regulated in terms of
differs depending on whether the business being measured is QSE        Code 700 (for non-QSEs) and Code 800, Statement 807 (for QSEs).
or not. Socio-economic development contributions will contribute


The following socio-economic development contribution scorecard applies to non-QSEs:

Criteria                                                                                                      Weighting points

Average annual value of all qualifying contributions made by the measured entity measured                      5
from the commencement of this statement or the inception date to the date of
measurement as a percentage of the target


The following socio-economic development contribution scorecard applies to QSEs:
Criteria                                                                                                      Weighting points

Average annual value of all qualifying contributions made by the measured entity measured                     25
from the commencement of this statement or the inception date to the date of measurement
as a percentage of the target



9.2    What is the significance of the "commencement/                  The decision by the DTI to allow recognition of historic corporate
       inception date"?                                                social investment contributions is laudable. As with the enterprise
                                                                       development code, the intent has been undermined by the provision
                                                                       referring to the "inception date". This provision asserts that, where
The Code specially provides for the recognition of any historical
                                                                       the inception date of the social responsibility undertaken by the
initiatives, undertaken by measured businesses, as socio-economic      measured entity is selected by such entity, that earlier date may not
development contributions. There are a number of SA businesses         be more than five years prior to the commencement date of the
and multinationals operating in South Africa which have historically   Codes. The provision therefore has the effect of limiting the
undertaken corporate social responsibility.                            recognition of historic corporate social responsibility.


35 l       Cliffe Dekker Hofmeyr THE WAY TO BEE
Corporate social investment contributions are recognised on a                 community training, skills development for unemployed
cumulative basis. Therefore, they may be measured either from the             people, adult basic education and training; or
date of commencement of the Codes (commencement date), or
from the abovementioned earlier inception date.                               support of arts, cultural or sporting development programmes.


9.3   What are the objectives of socio-economic                         9.4   Who qualifies as a contribution beneficiary?
      development?
                                                                        Code 700 recognises the following as beneficiaries:
"Socio-economic development" is defined to include programmes
                                                                              the full value of socio-economic development contributions
and contributions, approved socio-economic development
                                                                              made to beneficiaries will be recognised if at least 75% of the
programmes and sector specific programmes.
                                                                              value directly benefits black people; or

"Approved socio-economic development programmes" refers to                    if less than 75% of the full value of socio-economic
monetary or non-monetary contributions carried out for the benefit            development contributions directly benefits black people,
of any project approved for socio-economic development by any                 the percentage of the full value that does benefit black people
organ of state or sector. They include:                                       will be recognised.

      projects focusing on environmental conservation,
                                                                        9.5   What types of contributions can be made?
      awareness, education and waste management;

      projects targeting infrastructural development, enterprise        Code 700 recognises the following types of contributions:
      creation or reconstruction in underdeveloped areas;
                                                                              grant contributions to beneficiaries of socio-economic
      projects targeting rural communities or geographic areas                development contributions;
      identified in the government's integrated sustainable rural
                                                                              guarantees given, or security provided, for beneficiaries;
      development or urban renewal programmes;
                                                                              direct costs incurred by a measured entity in assisting
      the provision of development capital for communities;
                                                                              beneficiaries;
      training or mentoring to beneficiary communities which will
                                                                              overhead costs of a measured entity directly attributable to
      assist them to increase financial capacity; and
                                                                              socio-economic development contributions;
      offering preferential terms to beneficiary communities when
                                                                              developmental capital advanced to beneficiary communities;
      purchasing their goods/services.
                                                                              preferential terms granted by a measured entity for its supply
The purpose of this element of the scorecard is to encourage                  of goods or services to beneficiary communities;
initiatives that enhance the ability of black people who are not part
of the economic mainstream to participate in the economy.                     payments made by the measured entity to third parties to
                                                                              perform socio-economic development on the measured
Socio-economic development programmes commonly take the                       entity's behalf;
following forms:                                                              provision of training or mentoring to beneficiary communities
                                                                              which will assist them to increase their financial capacity; and
      development programmes for women, youth, people with
      disabilities, people living in rural areas;                             the maintenance by the measured entity of a socio-economic
                                                                              development unit which focuses only on support of beneficiaries
      support of healthcare and HIV/AIDS programmes;
                                                                              and beneficiary communities.
      support for education programmes, resources and materials
      at primary, secondary and tertiary education level, as well as
      bursaries and scholarships;


                                                                                        Cliffe Dekker Hofmeyr THE WAY TO BEE            l 36
10     VERIFICATION

10.1 What is the purpose of BEE verification?                              10.2 Who is responsible for BEE verification?

The rationale for BEE verification lies in compliance monitoring,          In order to have its BEE status verified, a measured enterprise would
and relates to the process (undertaken by an accredited verification       need to employ the services of an accredited verification agency to
agency) of determining the overall extent to which a measured              evaluate and measure its BEE compliance.
entity complies with the BEE targets set out in the Codes. This
process gives confidence to all parties that rely upon the BEE score       Verification agencies are required, in conducting the BEE verification
of a measured entity (as set out in a verification certificate) that the   process, to apply the guidelines contemplated in the BEE verification
information on which the certificate is based has been verified and        manual gazetted on 18 July 2008.
its accuracy tested. Verification is therefore intended to reduce the
risk of misstatement of individual scorecard elements to an acceptably     In order to conduct their verification activities legitimately, verification
low level and to provide an assurance of the integrity of the              agencies are required to be accredited by the South African National
information on which the verification is based.                            Accreditation System (SANAS) against criteria specified in SANAS
                                                                           R47. The relevant provisions of SANAS R47 were incorporated
In an effort to measure how enterprises fare in relation to one            into the verification manual. To date, a small number of verification
another, the Codes have introduced a rating system whereby                 agencies have been accredited by SANAS.
measured entities are accorded an overall BEE compliance level.
Please refer to Paragraph 2.5.                                             10.3 What is the status of verification certificated issued
                                                                                by non-accredited agencies?
A level 1 contributor is therefore the highest overall BEE status
level that a measured enterprise can achieve, and any enterprise           The DTI issued regulations effective from 1 August 2009 to the
scoring less than 30 points on the scorecard is regarded as a non-         effect that:
compliant contributor. It should be noted that even though the
generic scorecard should, in theory, be calculated out of a total of             from 1 February 2010, only BEE verification certificates
100 BEE contribution points, due to bonus points applying in respect             issued by accredited verification agencies accredited by SANAS
of certain BEE elements such as ownership, it is notionally possible             or verification agencies that are in possession of a valid
for a measured enterprise to score more than 100 points using the                pre-assessment letter from SANAS will be valid and the period
scorecard system.                                                                of validity of these certificates will be 12 months from the date
                                                                                 of issue; and
Increasingly, it has become common place for regulators and
government agencies that are required to apply the Codes in the                  all verification certificates issued by non-accredited verification
award of tenders, licenses, or any other government-related                      agencies before 1 February 2010, will remain valid for
transactions where BEE forms part of the evaluation criteria, to                 12 months from the date of issue.
require bidders to meet a threshold BEE status for purposes of             These regulations effectively render self assessment legally ineffective
qualifying for consideration of such award. Tenders are therefore          from a BEE compliance perspective.
increasingly requiring bidders to meet, for example a level 3 BEE
contributor status, so as to be considered for such award.                 10.4 How will verifications be done?

Each BEE status band (levels 1 to 8) is assigned a corresponding
                                                                           Verifications must be done in accordance with a verification plan
BEE procurement recognition level, being the portion of spend
                                                                           to be drawn up by the verification agency and must take place at
which an enterprise can claim for interacting with the measured
                                                                           the business premises of the measured enterprise.
enterprise. For example, if a measured entity procures from a level
3 contributor, it can claim R1.10 in every R1 spent on that entity,        The verification team is required to gather documentary evidence
as BEE procurement spend.                                                  and will interview a sample of sufficient staff of the measured entity


37 l     Cliffe Dekker Hofmeyr THE WAY TO BEE
to ensure that the information gathered is sound. The verification     verifying the overall BEE status of that measured entity as well as
team will then analyse all the information and evidence to determine   the scoring for each BEE scorecard element. In terms of the
the BEE status of the measured entity.                                 verification manual, verification agencies are required to keep a
                                                                       record of all verification certificates they issue.
The reference sources applied by a verification agency to evaluate
a measured entity's BEE compliance are:                                The verification agency is also required to issue a verification report
                                                                       providing a detailed explanation of how it arrived at the scores
     the Codes;
                                                                       achieved in respect of each BEE element, and consequently the
     generic and QSE scorecards;                                       overall BEE status of the measured enterprise.

     sector codes gazetted in terms of section 9 of the BEE Act;
                                                                       A verification certificate will be valid for a period of one year after
     (if relevant) criteria for EMEs under the Codes;                  its date of issue.

     any other guidelines issued by the DTI; and
                                                                       10.5 When should verification certificates be used?
     any other legislation as provided for in the Codes such as the
     EEA and the Skills Development Act.                               Verification certificates may be made publicly available by a
                                                                       measured entity when engaging, for example, with third parties
Once the verification process is complete, the verification agency     seeking information of the measured entity's BEE status or in tenders
must issue the measured enterprise with a verification certificate     submitted by a measured entity.




CONCLUSION

Since the publication of the final Codes more than two years ago,      Act and Codes, and should therefore provide public bodies and
there has been much progress in the arena of BEE measurement           state-controlled enterprises with clear guidance on how to deal with
and compliance, as well as additional complexities and uncertainties   the provisions of the BEE Act and the Codes in their procurement
which are often associated with areas that are dynamic and             policies.
politically-driven.
                                                                       The recent changes in government have also led to many public
The Codes have afforded us greater certainty with regard to the        utterances and debate about whether or not BEE in its current form
measurement and regulation of BEE.                                     is achieving its aims, and we may see further changes to BEE policy
                                                                       in the future.
The verification industry has begun to see proper regulation with
the commencement of accreditations by SANAS and the introduction       Whatever changes are made, it is clear that BEE will remain an
of verification guidelines.                                            imperative for some time to come.

The long awaited amendments to the PPPFA are currently in draft
form. These amendments seek to align the PPPFA with the BEE




                                                                                       Cliffe Dekker Hofmeyr THE WAY TO BEE             l 38
11 GLOSSARY - The Way to BEE 2009


ABET                      Adult Basic Education and Training
ASGISA                    Accelerated and Shared Growth Initiative
BEE Act                   B-BBEE Act (Broad-based Black Economic Empowerment Act of 2003)
BEE                       Black Economic Empowerment
Commencement Date         Date of commencement of the Codes
DTI                       Department of Trade and Industry
DME Codes                 Codes of Good Practice for the Mineral Industry
Codes                     Codes of Good Practice
Constitution              Constitution of the Republic of South Africa Act of 1993
EAP                       Economically Active Population
EEA                       Employment Equity Act
ESOPs                     Employee Share Ownership Schemes
EMEs                      Exempted Micro Enterprises
JIPSA                     Joint Initiative for Priority Skills Acquisition
LPM                       Learning Programme Matrix
NPAT                      Net Profit After Tax
PFMA                      Public Finance Management Act, 1999
PPPFA                     Preferential Procurement Policy Framework Act, 2000
QSEs                      Qualifying Small Enterprises
RSA                       Republic of South Africa
SA                        South African
SANAS                     South African National Accreditation System
SETA                      Sector Education and Training Authority
TMPS                      Total Measured Procurement Spend
TBPS                      Total BEE Procurement Spend




39 l    Cliffe Dekker Hofmeyr THE WAY TO BEE
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posted:2/14/2011
language:English
pages:41